Topics: Inflation, Unemployment, Economics Pages: 8 (2756 words) Published: February 25, 2013

According to Pigou – “Inflation exists when money income is expanding more than in proportion to increase in earning activity.”

What is Inflation?
In a broad sense of the term, inflation means a considerable and persistent rise in the general level of prices over a long period of time. However, there is no universally acceptable definition of inflation. A continuous rise in the general price level over a long period of time . Persistent inflation in perhaps the second most serious macroeconomics problem confronting the world economy today. The persistent inflation and the problems associated with inflation have claimed more attention of the economists than any other macroeconomic problem. This has led to abounding increase in the literature on inflation. In this part of the book, we are concerned with three main aspect of inflation , (i) meaning, measurement and effects of inflation, (ii) theories of inflation and, (iii) the relationship between inflation and unemployment.


The question as to what is a “considerable” rate of inflation can be answered by linking it to the desirability of inflation. A moderate rate of inflation is considered to be desirable and acceptable for at least three reasons: (i) a moderate rate of inflation keeps the economic outlook optimistic, promotes economic activity and prevents economic stagnation, (ii) it is helpful in the mobilization of resources by increasing the overall rate of savings and investment-inflationary financing has, in fact, been widely used to finance economic growth of the undeveloped countries, and (iii) it is historical evident that, despite intermittent deflation, the general price level has exhibited a rising trend, and some increase in the general price level is inevitable in a dynamic and progressive economy.

Now the question arise: What rate of inflation should be considered as the ‘moderate rate of inflation’? This question cannot be answered in specific percentage terms because desirability of inflation depends on the need and the absorption capacity of a country which are subject to variation from time to time. The capacity of a country to absorb inflation may be defined in terms of the limit of the price rise beyond which the economy gets overheated and macro variables like saving, investment, growth of output, BOP position, and employment get adversely affected.


Inflation is generally classified on the basis of its rate and cause. In this section, we discuss the types of inflation classified on the basis of rate. The types of inflation will be discussed under the cause of inflation. On rate basis, inflation is classified as: (i) Moderate Inflation : When the general level of price rises at a moderate rate over a long period of time, it is called Moderate inflation or creeping inflation. The ‘moderate rate’ may vary from country to country. However, ‘a single digit’ rate of annual inflation is called ‘moderate inflation’. An important feature of moderate inflation is that it is predictable. During the period of moderate inflation, the people continue to have faith in the monetary system and confidence in ‘money as a store if value’. (ii) Galloping Inflation : According to Baumol and Blinder, “Galloping inflation refers to an inflation that proceeds at an exceptionally high rate.” They do not specify what rate of inflation is ‘exceptionally high.’ Example of inflation is that, the pose-War I inflation in Germany is often cited as an example of galloping inflation though some would call it hyperinflation. The wholesale prices in Germany increased 140 percent in 1921 and a colossal 4100percent in 1922. And also prices are increased in another country like, Brazil, Mexico, Peru, etc. (iii) Hyper Inflation : In general , a price rise at more than three-digit rate per annum is called ‘Hyper inflation’. According to some...
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