What is Inflation

The meaning of Inflation :
  •  In economics inflation means, a rise in general level of prices of goods and services in a economy over a period of time.   
  • When the general price level rises, each unit of currency buys fewer goods and services.  Thus, inflation results in loss of value of money.   
  • Another popular way of looking at inflation is "too much money chasing too few goods".   The last definition attributes the cause of inflation to monetary growth relative to the output / availability of goods and services in the economy.
  •  In case the price of say only one commodity rise sharply but prices of other commodities fall, it will not be termed as inflation.  Similarly, in case due to rumors if the price of a commodity rise during the day itself, it will not be termed as inflation. 
Types of inflation :
  • Broadly inflation is divided into two categories :- 
  • (i) DEMAND - PULL INFLATION:   
  • In this type of inflation prices increase results  from an excess of demand over supply for the economy as a whole. Demand inflation occurs when supply cannot expand any more to meet demand; that is, when critical production factors are being fully utilized, also called Demand inflation.
  •  (ii) COST - PUSH INFLATION:   
  • This type of inflation occurs when general price levels rise owing to rising input costs. In general, there are three factors that could contribute to Cost-Push inflation: rising wages, increases in corporate taxes, and imported inflation. [imported raw or partly-finished goods may become  expensive due to rise in international costs or as a result of  depreciation of local currency ]