Inflation: Types, Effects & How is It measured

By Stuti Mishra|Updated : January 19th, 2021

Inflation is a quantitative rate’s measure at which the average price level of selected goods and services basket in an economy increases over a period of time. We have come up with everything you need to know about 'inflation'.

What is Inflation?

  • Inflation is a quantitative rate’s measure at which the average price level of selected goods and services basket in an economy increases over a period of time.
  • It is situation under which there is sustained, unchecked increase in the general price level.
  • It depicts fall in the purchasing power of money.
  • Inflation can be have positive as well as negative consequences like inflation is good for tangible assets but has negative effect on cash holdings.
  • It is estimated as the percentage rate of change in price index over the reference time-period.
  • Currently in India inflation rate is measured with the help of Consumer Price Index- combined (Base year- 2012).
  • Till April 2014, the Inflation rate was measured with the help of WPI (Wholesale Price Index).
  • Rate of Inflation= (Current period price index-Reference period price index)/(Reference Period Price Index)×100

Types of Inflation

Based on Causes

  1. Currency inflation: Printing of currency notes causes this type of inflation.
  2. Credit inflation: Credit expansion leads to a rise in price level causing inflation.
  3. Deficit-induced inflation: When expenditure exceeds revenue, government can ask RBI to print money to meet the budget deficit causing deficit-induced inflation.
  4. Demand-Pull inflation: An increase in aggregate demand over the available output leads to a rise in the price level and is called demand-pull in­flation. 
  5. Cost-push inflation: Inflation in an economy may arise from the overall increase in the cost of production and is known as cost-push inflation.

Based on Speed or Intensity

  1. Creeping or Mild Inflation
    • When the speed of upward thrust in prices is slow but small, it is known as creeping inflation.
    • It is helpful for economic development.
    • Price rise at very small rate (<3%).
  2. Walking or Trotting Inflation
    • When prices rise moderately and annual inflation rate rises in a single digit, walking inflation occurs.
    • It is the time when government should focus on the issue.
    • Price rise at moderate rate (3% <Inflation< 10%)
  3. Galloping and Hyperinflation:
    • When creeping and walking inflation are left unchecked, the rate of inflation will rise above 10% and termed as galloping inflation.
    • This leads to instability of the economy.
    • Hyperinflation is when the prices of goods and services rise more than 50% per month.
    • It is the last stage of inflation.
    • Examples: Germany in the 1920s, Zimbabwe in the 2000s, American Civil War and Venezuela in 2018. 
    • Price rise at very high rate (20% < Inflation < 100%)
  4. Stagflation:  
    • It is a situation in which the inflation rate is high, economic growth rate slows, and unemployment remains steadily high.
    • It is also known as recession inflation.
    • It is dilemma for economic policy, since actions intended to lower inflation may worsen unemployment situation.
  5. Core Inflation
    • Price rise in all goods and services except food and energy due to high prices fluctuations is core inflation.
    • It is calculated as government needs a stable and true picture of inflation.
  6. Headline Inflation
    • This measure considers total inflation in an economy, including food and energy prices, which are more volatile.

Causes of Inflation

Rising prices are the root of inflation. However, it can be classified into three types:

  1. Demand Pull factors: These are the set of factors due to which there may be an increase in the demand for goods and services in an economy. Its example include:
  • Increase in government expenditure putting more money in the hands of public which in turn increases demand and prices automatically increases.
  • Population increase
  • Money hoarding
  • Fluctuated consumption pattern.
  1. Cost- Push Factors: This factor is a result of the increase in the prices of production process inputs. For example: If wages increase than the productivity, increase in price of a product can be seen.
  • Increase in indirect taxes like custom and excise duty raise the cost of production increasing the price.
  • MSP (Minimum Support Price) increase
  • Infrastructural issues
  • Failed monsoon and disaster.
  1. Built-in inflation: As the price of goods and services increases, labour expects and demands more wages to maintain their cost of living that increases price and wage-price spiral continues.

Effects of Inflation

  1. Redistribution of income and wealth:
  • Due to the effect of inflation, some group of people loses and another group of people gains.
  • Example-
    In case of debtors and creditors-
    Debtor- gainer
    Creditor- loser
    In case of Producers and Consumers
    Producer- gainer
    Consumer- loser
  1. Effects on Production and Consumption:
  • Due to inflation, the demand decreases which curtails the production.
  • People try to use fewer services which lead to decrease in consumption.
  1. Unfavorable Balance of Payments:
  • Export decreases and import increases from other countries which lead to decrease in forex reserve.

How is Inflation Measured?

The inflation rate is calculated as a percentage change in price index.

1. Wholesale Price Index (WPI): Wholesale Price Index or WPI measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It is released by the Economic Advisor in the Ministry of Commerce and Industry.

  • An upward surge in WPI indicates inflationary pressure in the economy.
  • The base year is taken 2011-12 in India.
  • Major components of WPI are primary articles subdivided into Food Articles and Non-Food Articles.
  • Other component: Fuel & Power, Manufactured Goods like Textiles, Apparels, Metals, Sugar, Oils and more.
  • The monthly WPI shows average price changes of goods usually expressed in ratios or percentages.
  • However, it does not include services such as the health, IT, Education, transport and unorganized sector etc.

2Consumer Price Index: It measures retail inflation in the economy by collecting the change in prices of common goods and services like food, housing, apparel, transportation, electronics, medical care, education, etc. This provides insights as to how much a consumer can spend to be on par with the price change.

  • There are 4 consumer price index numbers in India: CPI for Industrial Workers, CPI for Agricultural Labourers, CPI for Rural Labourers and CPI for Rural Labourers.
  • CPI has much larger weightage of primary articles then WPI which is 57%. Hence, food inflation is reflected much more appropriately in the CPI when compared to the WPI which gives only 20% weightage to primary articles.
  • RBI had adopted the new Consumer Price Index (CPI) (combined) as the key measure of inflation. The national CPI is meant to measure retail inflation. This index will combine urban and rural CPIs, both under preparation and to be released simultaneously. Unlike many other countries, India does not have a unified CPI and uses the WPI as a benchmark. The unified CPI will usher in a fundamental shift in the way the Reserve Bank of India (RBI) targets inflation.

Measures to control Inflation

1. Monetary Measures: Tighter monetary policy can decrease demand-pull or the cost-push inflation.   

  • RBI may increase the bank rates/repo rates. etc (qualitative tool) to curb the supply of money in the market.
  • RBI can resort to Open Market Operations

2. Fiscal Measures: There are two ways of fiscal measure that can be taken by the government:

  • Cutting expenditure on schemes, projects, spending, etc.
  • Increasing direct or indirect tax.

Some Terms related to Inflation

  • Disinflation: Decrease in the rate of inflation
  • Deflation: Negative inflation or persistent price level decrease.
  • Reflation: This happens when the Price level increases because the economy recovers from recession.
  • Stagflation: When stagnation and inflation coexist in the economy. Stagnation- low national income growth and high unemployment. Inflation + Recession (Unemployment)
  • Misery index: Rate of inflation + Rate of unemployment
  • Inflationary gap: Aggregate demand > Aggregate supply
  • Deflationary gap: Aggregate supply > Aggregate demand
  • Suppressed / Repressed inflation: Aggregate demand > Aggregate supply. Government will not allow rising of prices in this.
  • Open inflation: Situation where price level rises without any price control measures by the government.


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karmath gaon familar village
Very helpful notes for competitive exam... thank you sir
Laxmana Mondi
MA3 v,8*8-*8-383/8,%
Very helpful to me
Shall v name reflation as suppressed inflation?plz somebody answer me
Shraddha Gupta
Can u upload pdf from affairs cloud
Manoj Kumar

Manoj KumarJan 19, 2021

Thanks mam
It's useful for upcoming exams
Thanks alot

DineshJan 20, 2021

can anyone solve this
if price is coded as 48 and love is coded as 12 then private is coded as

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PO, Clerk, SO, Insurance

BankingIBPS POIBPS ClerkSBI POIBPS SOSBI ClerkRBIRRBLICESICNainital BankOtherQuick LinkMock Test
tags :PO, Clerk, SO, InsuranceGeneral AwarenessIBPS PO OverviewIBPS PO NotificationIBPS PO Apply OnlineIBPS PO VacancyIBPS PO Eligibility Criteria

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