Meaning of Inflation

Inflation has become a buzzword for a long time. When the general price level increases the purchasing power of money decreases. If this continues over a period of time, this is called inflation. There are mainly three types of inflation:

Demand-Pull Inflation: When demand for goods and services are significantly higher than the supply of those goods and services, the general price level goes up. This excess demand appears from three sides; fiscal policy reaction, monetary policy and global environment. The effects of tax cuts, hefty government expenditure, subsidy provision, are the reasons for price rise due to fiscal measures. The monetary authority induces the price rise by printing and supplying more currencies, interest rate cuts, easy credit availability.  The mixed impact from both the fiscal and monetary policies are growth of the economy, consumer confidence and increasing employment, etc. that generate more purchasing power with the consumers.

 Cost-Push Inflation: when the cost of inputs like labour cost, raw material costs, cost of capital, etc increase, the producer shifts the increased cost to the buyers. Thus, the ultimate price turns out to be dearer. For example, a rise in the exchange rate results in costlier imports and leads to an increase in the product’s MRP. Labourers demanding higher wage shifts the price of the product too.

Built-In Inflation: The global environment like the ongoing Russia – Ukraine war, covid-19 pandemic, etc creates disturbance in the supply chain of essential goods and services. The supply shock induced the public to hoard the essential goods and services to face the possible supply shortages. The current economic situation in Sri Lanka and India is the example of this type of inflation.

Author: Dr. Tushar Panigrahi, Associate Professor –  Unitedworld School of Business (UWSB)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.