Demand-pull Inflation happens when the demand for goods or services outnumbers the capacity to supply them. Price appreciation is caused by a mismatch between supply and demand (a shortage).
Cost-push Inflation happens when the cost of goods and services rises. The price of the product rises as the price of the inputs (labour, raw materials, etc.) rises.
Built-in Inflation is the result of the expectation of future inflation. Price increases lead to greater earnings in order to cover the increasing cost of living. As a result, high wages raise the cost of production, which has an impact on product pricing. As a result, the circle continues.
What are the four different kinds of inflation?
When the cost of goods and services rises, this is referred to as inflation. Inflation is divided into four categories based on its speed. “Creeping,” “walking,” “galloping,” and “hyperinflation” are some of the terms used. Asset inflation and wage inflation are two different types of inflation. Demand-pull (also known as “price inflation”) and cost-push inflation are two additional types of inflation, according to some analysts, yet they are also sources of inflation. The increase of the money supply is also a factor.
How many different kinds of inflation are there?
- Inflation is defined as the rate at which a currency’s value falls and, as a result, the overall level of prices for goods and services rises.
- Demand-Pull inflation, Cost-Push inflation, and Built-In inflation are three forms of inflation that are occasionally used to classify it.
- The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are the two most widely used inflation indices (WPI).
- Depending on one’s perspective and rate of change, inflation can be perceived favourably or negatively.
- Those possessing tangible assets, such as real estate or stockpiled goods, may benefit from inflation because it increases the value of their holdings.
What are the two most common forms of inflation?
Keynesian economics is defined by its emphasis on aggregate demand as the primary driver of economic development, despite the fact that its modern interpretation is still evolving. As a result, followers of this tradition advocate for government intervention through fiscal and monetary policy to achieve desired economic objectives, such as increased employment or reduced business cycle instability. Inflation, according to the Keynesian school, is caused by economic factors such as rising production costs or increased aggregate demand. They distinguish between two types of inflation: cost-push inflation and demand-pull inflation, in particular.
What are the four factors that contribute to inflation?
Inflation is a significant factor in the economy that affects everyone’s finances. Here’s an in-depth look at the five primary reasons of this economic phenomenon so you can comprehend it better.
Growing Economy
Unemployment falls and salaries normally rise in a developing or expanding economy. As a result, more people have more money in their pockets, which they are ready to spend on both luxuries and necessities. This increased demand allows suppliers to raise prices, which leads to more jobs, which leads to more money in circulation, and so on.
In this setting, inflation is viewed as beneficial. The Federal Reserve does, in fact, favor inflation since it is a sign of a healthy economy. The Fed, on the other hand, wants only a small amount of inflation, aiming for a core inflation rate of 2% annually. Many economists concur, estimating yearly inflation to be between 2% and 3%, as measured by the consumer price index. They consider this a good increase as long as it does not significantly surpass the economy’s growth as measured by GDP (GDP).
Demand-pull inflation is defined as a rise in consumer expenditure and demand as a result of an expanding economy.
Expansion of the Money Supply
Demand-pull inflation can also be fueled by a larger money supply. This occurs when the Fed issues money at a faster rate than the economy’s growth rate. Demand rises as more money circulates, and prices rise in response.
Another way to look at it is as follows: Consider a web-based auction. The bigger the number of bids (or the amount of money invested in an object), the higher the price. Remember that money is worth whatever we consider important enough to swap it for.
Government Regulation
The government has the power to enact new regulations or tariffs that make it more expensive for businesses to manufacture or import goods. They pass on the additional costs to customers in the form of higher prices. Cost-push inflation arises as a result of this.
Managing the National Debt
When the national debt becomes unmanageable, the government has two options. One option is to increase taxes in order to make debt payments. If corporation taxes are raised, companies will most likely pass the cost on to consumers in the form of increased pricing. This is a different type of cost-push inflation situation.
The government’s second alternative is to print more money, of course. As previously stated, this can lead to demand-pull inflation. As a result, if the government applies both techniques to address the national debt, demand-pull and cost-push inflation may be affected.
Exchange Rate Changes
When the US dollar’s value falls in relation to other currencies, it loses purchasing power. In other words, imported goods which account for the vast bulk of consumer goods purchased in the United States become more expensive to purchase. Their price rises. The resulting inflation is known as cost-push inflation.
What is inflation, and what produces it?
Other factors could drive aggregate demand and, as a result, price levels higher. Population growth, for example, boosts aggregate demand. Higher export profits provide exporting countries more purchasing power. Having more purchasing power means having more aggregate demand. If the government repays its public debt, purchasing power and, as a result, aggregate demand may rise.
The holders of illegal money have a tendency to spend more on conspicuous consumption goods. This type of behavior feeds the inflationary fire. As a result, a number of things contribute to DPI.
(iii) Cost-Push Inflation Theory:
Aggregate supply, in addition to aggregate demand, contributes to the inflationary process. We term inflation CPI because it is caused by a leftward change in aggregate supply. CPI is frequently linked to non-monetary issues. CPI is a measure of inflation caused by rising production costs. A rise in the cost of raw materials or an increase in labor could raise the cost of production.
Wage increases, on the other hand, may contribute to a rise in worker productivity. If this happens, the AS curve will shift to the right, rather than the left. Despite an increase in pay, we assume that productivity does not change.
Firms pass on such cost increases to consumers by raising the prices of their products. Costs rise in tandem with earnings. Price increases are a result of growing costs. Moreover, rising costs drive trade unions to seek higher pay once more. As a result, an inflationary wage-price spiral develops. As a result, the aggregate supply curve shifts to the left.
This may be seen graphically in Figure 1, where AS1 represents the initial aggregate supply curve. This AS curve is positive sloping below full employment, and it becomes absolutely inelastic at full employment.
The price level is determined by the intersection point (E1) of the AD1 and AS1 curves (OP1). The aggregate supply curve has shifted leftward to AS2. With no change in aggregate demand, this raises the price level to OP2 and lowers output to OY2. With a decrease in output, the economy’s employment declines or unemployment rises. A higher price level (OP3) and a lower volume of aggregate output come from a further shift in the AS curve to AS3 (OY3). As a result, CPI can occur even before a person reaches full employment (YF).
(iv) Causes of Cost-Push Inflation:
The cost variables are what cause the prices to rise. The growth in the price of raw materials is one of the major drivers of price increases. For example, the government can raise the price of gasoline or diesel or the freight rate by issuing an administrative order. Firms are now paying a greater premium for these inputs. As a result, the cost of production is under increased pressure.
Furthermore, CPI is frequently acquired from outside the economy. OPEC’s increase in the price of gasoline forces the government to raise the price of gasoline and diesel. Every industry, especially the transportation sector, need these two vital raw commodities. As a result, transportation costs rise, resulting in an increase in the overall price level.
Wage-push inflation or profit-push inflation can both cause CPI to rise. As a compensation for rising inflationary prices, trade unions demand increased monetary pay. If rising money wages outstrip rising labor productivity, aggregate supply will shift upward and to the left. Firms frequently use their power to increase profit margins by raising prices regardless of consumer demand.
Changes in fiscal policy, such as higher tax rates, put upward pressure on production costs. An increase in the excise tax on mass consumption goods, for example, is unquestionably inflationary. As a result, the government is accused of inducing inflation.
Finally, manufacturing difficulties may lead to output reductions. Natural disasters, slow depletion of natural resources, labor stoppages, power outages, and other factors could reduce aggregate output. In the middle of this output decline, merchants and hoarders create artificial scarcity of any items, which simply exacerbates the issue.
Other factors include inefficiency, corruption, and economic mismanagement. As a result, a variety of factors interact to generate inflation. Any increase in inflationary prices cannot be blamed on a single factor.
How does India calculate inflation?
In India, price indices are used to calculate inflation and deflation by determining changes in commodity and service rates. In India, inflation is measured using the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) (CPI).
What does GDP mean?
This article is part of Statistics for Beginners, a section of Statistics Described where statistical indicators and ideas are explained in a straightforward manner to make the world of statistics a little easier for pupils, students, and anybody else interested in statistics.
The most generally used measure of an economy’s size is gross domestic product (GDP). GDP can be calculated for a single country, a region (such as Tuscany in Italy or Burgundy in France), or a collection of countries (such as the European Union) (EU). The Gross Domestic Product (GDP) is the sum of all value added in a given economy. The value added is the difference between the value of the goods and services produced and the value of the goods and services required to produce them, also known as intermediate consumption. More about that in the following article.