Answer to Question #311248 in Macroeconomics for Ronald

Question

What are the various types of inflation? What are the criteria used for differentiating

between them? Explain.

Answer 1

QUESTION:

1.     What are the various types of inflation? What are the criteria used for differentiating between them? Explain

 

Solution

Inflation refers to the progressive increase in prices of goods in an economy. The following are types of inflation;

                               I.           Cost-push Inflation: It occurs when the cost of production increases prices of the inputs such as labour ,raw materials, e.t.c leading to an increase in  the price of the product. 

                             II.           Demand-pull Inflation: occurs when the demand for goods or services is higher when compared to the production capacity. The difference between demand and supply resulting in price appreciation.

                           III.           Built-in Inflation: Expectation of future inflations results in Built-in Inflation. A rise in prices results in higher wages to afford the increased cost of living. Therefore, high wages result in increased cost of production, which in turn has an impact on product pricing.

                           IV.           Hyperinflation: occurs when prices skyrocket by more than 50% per month.

There are two approaches used for differentiating between the various types of inflation which are:

(i)                Consumer price index (CPI) -is used to measure changes faced by urban consumers who represent a large population.

(ii)              Personal Consumption Expenditure (PCE) -it measures the change in prices for all consumption items not just paid for cut of pocket by consumers.

 

Both CPI and PCE price index indicate various change in prices which tend to be volatile. They show core inflation which are often seen as a better indicator of the underlying pace of price charges and differentiate between various types of inflation.