Inflation– very often we come across this term especially in the news channels and the newspapers wherein economies are discussed on an everyday basis. What is inflation exactly? Inflation is simply the persistent increase in the overall price level. Now, two points are important over here-
- First, it is the increase in the overall price level and not merely the rise in prices of say one or two commodities being traded in the country.
- Second, the rise is for a long duration. If there is a rise in price level for one year and then the prices go down the next year, then this cannot be named as inflation. In order to be referred to as inflation, the rise in the overall price level must be over a longer duration.
There are basically two kinds of inflation-
This occurs when the demand for goods and services is greater than its supplies. This is a situation of excess demand, and in this situation the scarcity of goods gives rise to a controlling power with the producers and hence results in upward movement of the prices.
Supply side inflation
This type of inflation occurs from the supply side. This occurs when the rise in prices of goods is caused due to rise in the cost of production. There can be a rise in the cost of production because of the following reasons- 1) Higher wage rates; 2) Motive for higher profit margins; 3) Payment of higher taxes; 4) When there is a scarcity in the availability of the basic inputs required for production.
Anything upto a certain limit is desirable and so is inflation. Inflation upto a certain degree is a healthy sign for any economy. It leads to greater capital formation in the economy and nearly all sections benefit. But beyond the desirable level, inflation can be dangerous!