Inflation On basis Time Period, Coverage and Government Reaction

Types of inflation on the basis of time (period) of occurrence:

War-Time Inflation

Inflation that takes place during the period of a war-like situation is known as War-Time inflation. It is the outcome of certain exigencies of war, on account of increased government expenditure on defence which is of an unproductive nature

During a war, scare productive resources are all diverted and prioritized to produce military goods and equipment’s. This overall result in very limited supply or extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of basic goods slow down and can no longer meet the soaring demand from people. Consequently, prices of essential goods keep on rising in the market resulting in War-Time Inflation.

Post-War Inflation

It is a legacy of war. In the immediate post-war period, it is usually experienced. This may happen when the disposable income of the community increases, when war-time taxation is withdrawn or public debt is repaid in the post-war period. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war.

Peace-Time Inflation

When prices rise during a normal period of peace, it is known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of a long gestation (development) period.

Peace time inflation is often a result of increased government outlays on capital projects having a long gestation period; so a gap between money income and real wage goods develops. In a planning era, thus, when government’s expenditure increases, prices may rise.

Types of inflation on the basis of coverage and scope point of view

Comprehensive Inflation

When the prices of all commodities rise throughout the economy it is known as Comprehensive Inflation. Another name for comprehensive inflation is Economy Wide Inflation. It is a normal inflationary phenomenon and refers to a rise in the general price level.

Sporadic Inflation

When prices of only few commodities in few regions (areas) rise, it is known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon (winds bringing seasonal rains in India).

When the supply of some goods becomes inelastic, at least temporarily, due to physical or structural constraints, sporadic inflation has its sway. For instance, during drought conditions when there is a failure of crops, food grain prices shoot up. Sporadic inflation is a situation in which direct price control, if skilfully used, is most likely to be beneficial to the community at large.

 

Types of inflation on basis of Government’s reaction or its degree of control:

Open Inflation

When 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.

In open inflation, the free market mechanism is permitted to fulfil its historic function of rationing the short supply of goods and distribute them according to consumer’s ability to pay. Therefore, the essential characteristics of an open inflation lie in the operation of the price mechanism as the sole distributing agent. The post-war hyperinflation during the twenties in Germany is a living example of open inflation

Suppressed Inflation

When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.

The essential characteristic of repressed inflation, in contrast to open inflation, is that the former seeks to prevent distribution through price rise under free market mechanism and substitutes instead a distribution system based on controls. Thus, the administration of controls is an important feature of suppressed inflation.

However, many economists like Milton Friedman and G.N. Halm opine that if there has to be any inflation, it is better open than suppressed. Suppressed inflation is condemned as it breeds a number of evils like black market, hierarchy of price controllers and rationing officers, and uneconomic diversion of productive resources from essential industries to non-essential or less essential goods industries since there is a free price movement in the latter and hence are more profitable to investors.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: