LAHORE SCHOOL OF MANAGEMENT

COURSE TITLE:
PRINCIPLES OF MACRO ECONOMICS

ASSIGNMENT TOPIC:
INFLATION & IT’S TYPES (SUBTYPES)

ASSIGNMENT NO#1
SUBMITTED BY:
MAHAM MAROOF
BBA(HONS.) SEMESTER 3, FALL 2022.
DEPARTMENT OF COMMERCE

SUBMITTED TO:
SIR MUSTAFA PASHA

DATE OF SUBMISSION:
31-01-2024
 1. INFLATION:

❖ DEFINITION:
In economics, inflation is defined as a sustained increase in the general price level
of goods and services in an economy over a period. It is measured as an annual
percentage increase. When the general price level rises, each unit of currency buys
fewer goods and services. This implies that inflation reflects a reduction in the
purchasing power per unit of money. In other words, inflation indicates a loss of real
value in the medium of exchange and unit of account in the economy.
Different definitions of inflations have been given by different Economists
some of which are as follows:
1. In the words of Peterson, “The word inflation in the broadest possible sense refers
to any increase in the general price-level which is sustained and non-seasonal in
character.”
2. According to Coulbourn inflation can be defined as, “too much money chasing
too few goods.”
3. According to Samuelson-Nordhaus, “Inflation is a rise in the general level of
prices.
4. As per Johnson, “Inflation is an increase in the quantity of money faster than real
national output is expanding”.
5. Keynes has presented his view that true inflation is the one in which the elasticity
of supply of output is zero in response to an increase in supply of money.

2. TYPES OF INFLATION:

Inflation is usually categorized on different basis which are given as below:

A. On the basis of Rate: Inflation has been categorized into the following types
based on its different rates:
 1. Creeping Inflation:
Creeping Inflation, also known as Mild Inflation or Low Inflation refers to
that type of inflation when the rise in prices is very slow like that of snail or creeper.
It is the mildest form of inflation with less than 3% per annum.
2. Chronic Inflation:
If creeping inflation persists for a longer period, then it is often called Chronic
or Secular Inflation. It is called chronic because if and inflation rate continues to
grow for a longer period without any downturn which may possibly lead to
Hyperinflation.
3. Walking or Trotting Inflation:
When prices rise moderately with a single digit of less more than 3% but
less than 10% per annum it is called Walking Inflation.
4. Running Inflation:
A rapid acceleration in the rate of rising prices is referred to as Running
Inflation. This type of inflation occurs when prices rise by more than 10% per
annum.
5. Galloping Inflation:
Galloping inflation, also known as Jumping inflation, occurs when prices rise
by double or triple-digit inflation rates of more than 20% but less than 1000% per
annum.
6. Hyperinflation:
When prices rise at an alarming high rate with quadruple or four-digit inflation
rate of above 1000% per annum then is termed as Hyperinflation. It is a situation
where the prices rise so fast that it becomes very difficult to measure its magnitude.
During a worst-case scenario of hyperinflation, the value of the national currency of
an affected country falls almost to zero. Paper money becomes worthless, and people
start trading either in gold and silver or sometimes even use the old barter system of
commerce. Two worst examples of hyperinflation recorded in world history are of
those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under
Robert Mugabe's regime.

B. On the basis of Causes: Inflation has been categorized into the following types
because of its different causes:
1. Demand-Pull Inflation:
Demand-Pull Inflation, also known as Excess Demand Inflation, takes place
when aggregate demand for a good or service outstrips aggregate supply. In other
words, when aggregate demand for all purposes- consumption, investment and
government expenditure-exceeds the supply of goods at current prices then it is
called Demand-Pull Inflation. Demand-Pull inflation gives rise to a situation often
economists describe as “Too much money chasing too few goods”.
2. Cost-Push Inflation:
When prices rise due to the growing cost of production of goods and services
then it is known as Cost-Push Inflation. Cost-push inflation also came to known as
“New Inflation” is determined by supply-side factors mainly caused by higher wage-
push, Profit-Push and higher costs of raw materials.
3. Scarcity Inflation:
Scarcity inflation occurs due to hoarding by unscrupulous traders and black
marketers to create an artificial shortage of essential goods like food grains, kerosene
with an intension to sell them only at higher prices to make huge profits. 4.
Structural Inflation:
Structural inflation is that type of inflation often experienced in developing
countries which is caused by structural rigidities such as agricultural bottlenecks,
resource constraints bottlenecks, foreign exchange bottlenecks, physical
infrastructural bottlenecks etc.

C. On the basis of Coverage: Inflation has been categorized into following types
based on its coverage:

1. Comprehensive Inflation:
When the prices of all commodities rise throughout the economy it is known
as Comprehensive Inflation also known as Economy Wide Inflation.
2. Sporadic Inflation:
When prices of only a few commodities in a few regions rise, it is known as
Sporadic Inflation. It is sectional in nature. For example, the rise in food prices due
to bad monsoon represents this type of inflation.
D. On the basis of Occurrence: Inflation has been categorized into following types
based on its time of occurrence:

1. War-Time Inflation:
Inflation that takes place during the period of a war-like situation then it is
known as War-Time inflation. During a war, scare productive resources are all
diverted and prioritized to produce military goods and equipment's resulting in
extreme shortage of resources use producing essential commodities. Consequently,
prices of essential goods keep on rising in the market resulting in War-Time
Inflation.
2. Post-War Inflation:
Inflation that takes place soon after a war is known as Post-War Inflation.
After the war, government controls were relaxed, resulting in a faster hike in prices
than what experienced during the war.
3. Peace-Time Inflation:
When prices rise during a normal period of peace then it is known as Peace-
Time Inflation. It is due to huge government expenditure or spending on capital
projects of a long gestation period.

E. On the basis of Government Reaction: Inflation has been categorized into

following types based on Government's degree of reaction:

1. Open Inflation:
When the government does not attempt to restrict inflation, it is known as
Open Inflation. In a free market economy, where prices are allowed to take its own
course, open inflation occurs.
2. Suppressed Inflation:
When the government prevents price rise through price controls, rationing,
etc., it is known as Suppressed Inflation. It is also referred to as Repressed Inflation.
However, when government controls are removed, suppressed inflation becomes
Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial
scarcity, etc.