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Analysis Of The Types Of Inflation Economics Essay

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Published: Mon, 5 Dec 2016

Based on the economics view inflation refers to the increasing of the general level of prices of the goods and services in countries over a period of time. Inflation is when the prices of most goods and services continue to creep upward. It is measured by the Consumer Price Index (CPI). Each of the countries has their own level of inflation problem and they are tried to reduce their country inflation rate to the satisfaction level of it. The increasing of the general level of prices of the daily goods and services in the country will cause the same amount of currency only can buys fewer goods and services.

Types of Inflation

There are four main types of inflation. The various types of inflation are:

Wage Inflation

Wage inflation is also called as demand-pull or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime.

Cost-push Inflation

As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation.

Pricing Power Inflation

Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins. A point noteworthy is pricing power inflation does not occur at the time of financial crises and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services.

Sectoral Inflation

The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn.

Other Types of Inflation

Fiscal Inflation

Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget.

Hyperinflation

Hyperinflation is also known as runaway inflation or galloping inflation. This can usually lead to the complete breakdown of a country’s monetary system. However, this type of inflation is short-lived.

Any types of inflation can affect the economy of the country. Higher inflation will result in lower purchasing power of the citizen, higher cost of living, lower quality of life and also the overall country economic activities as well. The citizen will feel dissatisfaction to the high inflation and the worst is maybe will cause negative impact to the current government of that country. Inflation also will cause a loss of the currency real value in the internal medium of exchange market and unit of account of the country economy which means that the purchasing power and the value of the currency is depreciated due to the increasing of the general level of prices of the daily goods and services. The inflation rate is the main measure of the price inflation of the country. The inflation rate is the annualized percentage change in the general price index which we always hear about that Consumer Price Index (CPI) over time.

As we know that the Consumer Price Index (CPI) is measure about the consumer price of goods and services while the GDP deflator is measure about the inflation in the whole of the domestic economy. Consumer Price Index (CPI) measures change through time in the price level of consumer goods and services purchased by households. The Consumer Price Index (CPI) is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The annual percentage change in the Consumer Price Index (CPI) is used as a measure of inflation.

Most economists believe and agree that high inflation rate or hyperinflation is due to the excessive growth of the money supply of the country. The long sustained period of inflation is because of the money supply is growing faster than the economic growth of the country.

One of the examples of hyperinflation is the Africa country, Zimbabwe. The hyperinflation in Zimbabwe began in the early 2000 after the Zimbabwe’s confiscation of white-owned farmland and the government of Zimbabwe repudiates the debt to the International Monetary Fund (IMF).

In November 2008, Zimbabwe’s inflation rate is 89.7 sextillion percent and it increase to 6.5 quindecillion novemdecillion percent (6.5 %) on December 2008. The citizen of Zimbabwe need to pay at a very high value of money to buy daily goods and services for example a bread in Zimbabwe during hyperinflation is cost Z$ 500 000. The government of Zimbabwe tries to increase the supply of the money to overcome the problems but it makes the situation worst at all. The Reserve Bank of Zimbabwe issued Zimbabwe dollar 10 trillion, 20 trillion and 50 trillion (25 US Dollar) in January 2009 but it is nothing helps to the inflation problems. Finally in April 2009, government of Zimbabwe decided that Zimbabwe dollar was suspended and all trade is made in foreign currency such as US Dollar or South Africa Rand.

Malaysia Current Inflation Rate

According to the Malaysia Economic Report 2010/2011, Malaysia’s inflation is believed to remain beneficial at between 2% and 2.5% on this year and unlikely to alarm centre bank policy makers. Based on the current annual change in the Consumer Price Index (CPI) grew by 1.5% in the first eight months of the year as the strengthening economy of our country push up the food and non-alcoholic beverages, housing, utilities, gas and fuels, transport, tourism, medical and agriculture.

The main sector that account in the Malaysia inflation index is food price which is about 31% has increased 2.2% compare with last year. Besides that, Malaysia government decided to subsidy rationalization to reduce the fiscal deficit and financial burden this included daily necessary goods such as bread, sugar, diesel, petrol and liquefied petroleum gas and all of this push up the Consumer Price Index (CPI) as well.

The Malaysia’s inflation fell to a three-month low in September 2010, it reduce the pressure on policy makers to raise the interest rate on their next meeting. The Centre Bank Governor Tan Sri Zeti said that the current inflation is not a risk and they will provide policy makers with “flexibility” before decided on further interest-rate moves.

Malaysia’s inflation rate climbed in August to the highest level in 15 months, a gain that may put pressure on the central bank to consider resuming interest-rate increases after pausing this month. Consumer prices rise 2.1 percent from a year earlier after gaining 1.9 percent in July, the Putrajaya, Malaysia-based statistics department said in a statement.

Bank Negara Malaysia left its benchmark overnight policy rate at 2.75 percent on September after three consecutive increases, choosing to support growth as the global recovery slows. Still, it said Malaysia’s growth will be supported by “robust domestic economic activity” even as the external developments may moderate the pace of expansion.


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