Inflation | Meaning, Types, Causes, Effects, Control & Terminologies

What is Inflation? Inflation is the sustained increase in the overall price level of goods and services, resulting from a rise in the money supply without a corresponding increase in production volume.   Types of Inflation: Demand-Pull Inflation Cost-Push Inflation Hyper-Inflation Creeping Inflation Demand-Pull Inflation occurs when there is an excess demand for goods and […]

What is Inflation?

Inflation is the sustained increase in the overall price level of goods and services, resulting from a rise in the money supply without a corresponding increase in production volume.

 

Types of Inflation:

  1. Demand-Pull Inflation
  2. Cost-Push Inflation
  3. Hyper-Inflation
  4. Creeping Inflation

Demand-Pull Inflation occurs when there is an excess demand for goods and services compared to the available supply, often driven by factors such as population growth and increases in workers’ salaries.

 

Cost-Push Inflation happens when the cost of production factors rises, causing an automatic increase in the prices of goods and services. For example, an increase in the cost of raw materials can lead to higher prices for finished products.

 

Hyper-Inflation is characterized by a rapid and substantial rise in the prices of goods and services, leading to a loss of value in currency. War, budget deficits, and other factors contribute to hyperinflation.

 

Creeping Inflation is a slow but steady increase in the general prices of goods and services, also known as persistent inflation.

 

Causes of Inflation:

Inflation is triggered by various factors such as excess demand, low productivity in sectors like agriculture, salary and wage increases, high production costs, budget deficits, population growth, excessive bank lending, high import costs, hoarding, industrial strikes, poor storage facilities, and money laundering.

 

Effects of Inflation:

Positive Effects:

  1. Debtors benefit at the expense of creditors.
  2. Businesses can make profits during inflation.
  3. Inflation stimulates investment.
  4. Employment rates tend to be high during inflation, contributing to overall economic growth.

 

Negative Effects:

  1. Creditors incur losses as money loses its value.
  2. Economic distortion due to demands for increased wages.
  3. Fixed income earners, like salaried workers, suffer during inflation.
  4. Erosion of the value of money.
  5. Balance of payment problems.
  6. Discouragement of savings.
  7. Lowering of living standards.

 

How to Control Inflation:

  1. Encourage industrialization to increase the availability of goods and services.
  2. Adjust interest rates to discourage excessive borrowing.
  3. Implement effective fiscal policies, such as taxation, to reduce disposable income.
  4. Remove distribution system bottlenecks to facilitate the free flow of goods.
  5. Enact legislation to counter hoarding activities.
  6. Apply contractionary monetary policies to address inflation caused by increased money supply.
  7. Provide subsidies to farmers and businesses to control input prices.
  8. Consider wage freezing by the government.

 

Terminologies Associated with Inflation:

  1. Inflation Gap: Situation where total demand exceeds total supply.
  2. Inflation Spiral: Rise in prices leading to increased demands for higher incomes.
  3. Disinflation: Control of consumer expenditure to check inflation.
  4. Reflation: Economic revival through conscious government policies.
  5. Stagflation: Simultaneous existence of high inflation and slowing industrial production.
  6. Slumpflation: Reduced economic activity combined with inflation.

 

Deflation:

Deflation is a persistent decrease in the general price level, resulting from insufficient money circulation and is the opposite of inflation.

 

Causes of Deflation:

  1. Government budget surplus.
  2. Increased bank interest rates.
  3. Productivity surpassing demand with reduced money supply.
  4. Excessive taxation reducing disposable income and consumption.

Related Posts:

Financial Institutions | Money Market, Instruments, Capital Market

Money | Money Demand, Money Supply, Quantity Theory, Factors

Industries In Nigeria | Meaning, Types of Industries & Localization Of Industries

Supply Of Labour | Meaning, Factors, Demand For Labor, Wages, Unemployment, Trade Union

Labour Market | Meaning, Concept, Mobility Of Labor, Types, Efficiency

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top