Understanding the inflation and its impact



It refers to continuous rise in the price of goods and service. Inflation reduces the purchasing capacity of the currency of the country. It also affects our saving adversely.

Inflation affects the poor’s the most. If inflation rise sharply then it would be better to consume the money rather than deposit in the bank

Type of Inflation

Based on the cause behind inflation, it has been classified into 3 types

  1. Demand Pull
  2. Cost Push
  3. Structural Inflation
  1.  Demand Pull Inflation: It takes place in an economy due to increase in the demand. If the liquidity high in the economy either because of increase in our income or easily availability of loan from banks, then the consumer is left with more amount of money in his hand. This result in the increase in the demand. If this demand is not adequately matched with the supply then the price would raise leading to demand pull inflation.

    More and more public expenditure, development activities, employment creation etc. give rise to demand pull inflation.

  2. Cost Push Inflation: It take place in an economy because of increase in the cost of the production, if the raw material cost or the cost of any input increases, the price of the final product would automatically increases even if the demand is low.
  3. Structural Inflation: It takes place in the economy because of deficiency in the storage and distribution. It may also take place because of hoarding, cartelization, black marketing or due to poor connectivity of places through roadways and railways.

In India all these three factors are responsible for inflation that is the reason why rate of inflation in India has been always above comfort zone. The RBI has limited control over demand pull inflation. But it has no control over the other two types of inflation. Hence despite its repeated effort RBI has failed to control inflation continuously.

Inflation has been classified into 4 types

  1. 1% to 5% e. Creeping Inflation
  2. 5% to 10% e. Trotting/Walking Inflation e.g. India
  3. 10% to 30% i.e. Runaway inflation
  4. 30% and above i.e. Hyper Inflation/Galloping Inflation e.g. Zimbawe

 Author: Ashwani Kr