- Inflation is the rate at which general prices rise and purchasing power falls.
Low Inflation (Creeping Inflation)
- Prices rise slowly and predictably, in single digits annually.
- Regarded as safe and essential for economic growth.
- People are willing to save and sign long-term contracts.
Galloping Inflation (Very High Inflation)
- Inflation in double or triple digit range (20%, 100%, 200% per year).
- Found in countries with weak governments, war, or revolution.
- People hoard goods and avoid lending money at low nominal rates.
- Businesses are unwilling to invest due to high lending rates and declining demand.
Hyper Inflation
- Prices rise over a million percent per year.
- Relative prices become highly unstable.
- Example: Germany in the early 1920s, USSR in 1991.
Demand Pull Inflation
- Occurs when aggregate demand increases.
- Four sectors (households, private, government, foreign) want to buy more than economy can produce.
- “Too much money chasing too few goods.”
- Usually in an expanding economy.
- Caused by over-expansion of money supply, tax cuts, increased government spending.
Cost Push or Supply Shock Inflation
- Prices are “pushed up” by increased costs of factors of production.
- Or due to supply shortages.
- Caused by wage inflation, monopolies, natural disasters, currency devaluation.