Question

With reference to the picture given below answer the questions that follow:

1. Define the concept.
2. Explain any three types of the concept.

Answer 1

1. Inflation: Inflation is defined as a consistent/sustained increase in the aggregate price level and a fall in the value of money. Inflation is commonly understood to be a situation in which prices of goods and services persistently rise at a fast pace. It is important to note here that inflation refers to a state of rising prices and not a state of high prices. Moreover, every type of rise in price level is not called inflation. A substantial rise in price or rise in price at fast rates is called inflation. A substantial rise in price or rise in price at fast rates is called inflation. Another noteworthy point in this regard is that one time rise in the price level does not mean inflation. It is the persistent rise in the price level which is called inflation. Further, a rise in the price level for a short period of time, say 6 months or a year, is not regarded inflation. It is only when price increases continuously over a long period of time that it is treated as inflation.
   • Following are the main features of inflation:
     
     • Prices rise in the state of inflation.
     • Prices rise continuously over a long period of time.
     • Prices rise at faster rate.
     • Rise in prices of goods may not be equal for all goods and services.
   • Rate of Inflation: Rate of inflation refers to the rate at which inflation is increasing, over a specific period. In other words it is the rate of increase in prices over a given period of time. 
     The inflation rate is calculated using the consumer price Indies between two years. If the consumer price index (CPI) for this year is CPI₁ and the consumer price index last year is CPI₂, the rate of inflation between this year and last year is calculated as
     Rate of inflation = `("CPI"_2-"CPI"_1)/("CPI"_1)xx100`
     The consumer price index (CPI) measures the average change between two given periods in the prices paid by consumers for a representative basket of goods and services.
2. Types of Inflation:
   1. Creeping Inflation: Creeping inflation is the first stage of inflation. When the rise in prices is very slow, like that of a snail or creeper, it is called creeping inflation. In terms of speed, prices rise about 2 per cent annually, which is regarded as safe and essential for economic growth.
   2. Walking or Trotting Inflation: When prices rise moderately, and the annual inflation rate is in the single digits, it is called walking or trotting inflation. In other words, the rate of price rise is in the intermediate range of 3 to 6 per cent per annum or less than 10 per cent. Walking inflation is a warning signal for the government to control it before it turns into running inflation.
   3. Running Inflation: When prices rise rapidly at a rate or speed of around 10 per cent to 20 per cent per annum, it is called running inflation. Such inflation adversely affects the poor and middle class. Their economic position becomes worse during periods of inflation. The government should take the necessary steps to control it; otherwise, it will convert into hyperinflation.