Types of Inflation: Causes, Effects, and How India Controls Inflation
Types of Inflation show how and why prices rise in an economy. Inflation can be mild or extreme, caused by demand, rising costs, or supply issues. In India, inflation is managed through RBI policies, fiscal control, subsidies, and better supply chains to keep prices and growth stable.
Types of Inflation: Inflation is an important idea in economics that affects everyone and every business. It happens when the usual prices of goods and services in a country go up over time.
Knowing the types of inflation helps us understand how the economy is doing and make smart choices. Below, we explain the types of inflation in economics, the different kinds of inflation, types of inflation in India, their effects, and how India manages inflation.
What is Inflation?
Inflation is when the prices of goods and services go up over time, which makes money less valuable. When inflation happens, each unit of money can buy fewer things. Inflation is measured using tools like the Consumer Price Index (CPI), Wholesale Price Index (WPI), Producer Price Index (PPI), and GDP Deflator. A small amount of inflation can help the economy grow, but high inflation can make the economy unstable.
Different Types of Inflation in Economics
Inflation can be classified in many ways, and these are by the rate of increase in prices or by the underlying causes.
1. Types of Inflation Based on Rate
Inflation can be classified based on how fast prices rise over time. Below, we’ve mentioned the types of inflation based on rate:.
| Types of Inflation Based on Rate | |||
| Type | Annual Increase | Key Characteristics | Example |
| Creeping Inflation | < 3% | Mild, manageable, may stimulate growth | India’s stable inflation in 2015–2019 |
| Walking Inflation | 3–10% | Moderate; unchecked can overheat the economy | 1970s US inflation |
| Galloping Inflation | 10–50% | Rapid increase; disrupts economic stability | Oil crisis in India, 1970s |
| Hyperinflation | >50% monthly | Extreme; destroys currency value | Zimbabwe (2008), Weimar Germany (1923) |
2. Types of Inflation Based on Causes
Inflation can also be classified according to its underlying causes. Below, we’ve mentioned the types of inflation based on causes:
| Types of Inflation Based on Causes | |||
| Type | Cause | Characteristics | Example in India |
| Demand-Pull Inflation | Excess demand over supply | Prices rise as consumers compete for limited goods | Festival seasons (Diwali), wedding season demand |
| Cost-Push Inflation | Rising input costs | Businesses pass increased production costs to consumers | Petrol, steel, or food price hikes |
| Built-in Inflation | Adaptive expectations | Wage-price spiral effect | Wage hikes in the service sectors are leading to higher prices |
| Structural Inflation | Supply chain issues or monopolies | Price hikes in specific sectors | Power or transport sector disruptions |
| Protein Inflation | Shortage of protein-rich foods | Price rise in pulses, eggs, and meat | India’s pulse price spike in 2022 |
Types of Inflation in India
In India, prices go up in different ways because of changes in supply, demand, and government policies. Below, we’ve mentioned the types of inflation in India:
| Types of Inflation in India | ||
| Type of Inflation in India | Example | Impact |
| Demand-Pull Inflation | During festivals or holidays, demand for goods increases significantly | This will lead to higher prices for essential and non-essential items, affecting consumers’ daily budgets |
| Cost-Push Inflation | A rise in crude oil prices increases transportation and production costs | Businesses raise product prices to cover higher input costs, creating a general increase in the price level |
| Built-in Inflation | Workers demand higher wages because they expect future price increases | Companies increase product prices to cover higher labor costs, sustaining the inflation cycle |
| Structural Inflation | Disruptions in the supply chain for vegetables or grains | Prices of affected food items rise, particularly harming low-income households |
| Protein Inflation | Shortage of pulses or eggs in certain regions | Protein-rich foods become expensive, affecting nutrition and daily diets |
Effects of Different Types of Inflation
Different types of inflation will affect people and the economy in different ways. It can impact the shoppers, businesses, investors, and the country’s overall economy.
| Effects of Different Types of Inflation | |
| Impact of Inflation | Explanation |
| Reduced Purchasing Power | Consumers can buy fewer goods and services with the same amount of money. |
| Investment Returns | Real returns on fixed-income investments decrease, reducing purchasing power. |
| Income Inequality | Low-income households spend a larger share on essentials, widening the economic gap. |
| Business Costs | Rising costs for raw materials and wages increase operational expenses, affecting profitability. |
| Export Competitiveness | Higher domestic prices make exports less competitive internationally, potentially reducing demand. |
How does India Control Inflation?
India uses many strategies to control inflation and maintain price stability. These strategies involve monetary, fiscal, and supply-side measures. Below, we’ve mentioned how India controls inflation:
Monetary Policy: The Reserve Bank of India (RBI) controls inflation by changing interest rates. When rates are high, people will borrow and spend less, which helps in reducing inflation. When rates are low, borrowing and spending increase, which can help the economy grow when inflation is low.
Fiscal Policy: The government can control inflation by changing taxes and spending. If the government spends less or raises taxes, overall demand goes down, which can lower prices. If it spends more, demand goes up, which can raise prices.
Supply-Side Policies: Making factories, roads, and services better helps produce goods efficiently. This lowers production costs and keeps prices stable. Good supply chains also make sure essential goods are always available.
Price Controls and Subsidies: Sometimes the government sets temporary limits on prices or gives subsidies to reduce costs. For example, helping with the price of food or fuel can make living costs lower and stabilize prices.
Exchange Rate Management: A strong Indian rupee makes imported goods cheaper. This helps keep overall prices from rising too fast.
Targeted Interventions: The government may take specific actions to control prices in important areas. For example, releasing extra grain during shortages or changing import rules ensures essential goods are available and prices stay steady.
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Types of Inflation FAQs
What is inflation?
What are the main types of inflation based on the rate?
What are the main types of inflation based on causes?
How does inflation affect people and the economy?
How does India control inflation?
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