Types of Inflation
Types of Inflation:
Inflation, representing a general rise in the price level of goods and services over time, manifests in various forms depending on its underlying causes, intensity, and characteristics. Understanding these different types provides crucial insights for policymakers, economists, and individuals alike in navigating economic environments effectively.
Classification Based on Causes
Demand-Pull Inflation
Demand-pull inflation occurs when aggregate demand in an economy exceeds the available supply of goods and services, creating upward pressure on prices. This type of inflation emerges when consumers have increased purchasing power or when there is excessive demand relative to production capacity.
Key characteristics include:
Increased consumer spending due to higher disposable income
Expansion of money supply leading to more liquidity in the economy
Government fiscal stimulus and increased public spending
Low unemployment rates creating wage pressures
Growing economic confidence boosting investment and consumption
The mechanism operates through a demand-supply imbalance where “too much money chases too few goods”, forcing businesses to raise prices to balance supply with excessive demand.
Cost-Push Inflation
Cost-push inflation arises from increases in production costs that compel businesses to raise prices to maintain profit margins. Unlike demand-pull inflation, this type originates from the supply side of the economy rather than increased demand.
Primary drivers include:
Rising wages exceeding productivity gains
Increased costs of raw materials and intermediate goods
Higher energy prices, particularly oil price fluctuations
Imposition of indirect taxes and regulatory costs
Currency depreciation affecting import costs
Supply chain disruptions and transportation bottlenecks
Cost-push inflation is generally considered more problematic than demand-pull inflation because it reduces both output and national income while raising prices, creating a challenging economic environment for policymakers.
Built-In Inflation (Wage-Price Spiral)
Built-in inflation, also known as wage-price inflation or the wage-price spiral, represents a self-perpetuating cycle where wages and prices continuously influence each other. This phenomenon occurs when workers demand higher wages to maintain their purchasing power amid rising prices, leading businesses to increase prices further to cover higher labor costs.
The spiral mechanism operates in three stages:
Workers demand higher wages due to rising living costs
Businesses increase wages to retain skilled labor, raising production costs
Companies pass higher costs to consumers through increased prices, perpetuating the cycle
Historical examples include the 1970s stagflation in the United States, where persistent wage-price spirals contributed to sustained inflationary pressures despite sluggish economic growth. The post-COVID economic recovery also witnessed similar dynamics as labor shortages drove wage demands higher.
Structural Inflation
Structural inflation emerges from fundamental weaknesses in an economy’s productive capacity or institutional framework. This type is particularly prevalent in developing countries with underdeveloped infrastructure and rigid market structures.
Key characteristics include:
Inefficient supply chains and distribution networks
Lack of adequate infrastructure for production, storage, and transportation
Market rigidities and monopolistic structures
Institutional weaknesses and imperfect market functioning
Sectoral imbalances where some sectors face supply shortages while others experience excess demand
In India, structural inflation manifests when agricultural products face significant price markups from farm to consumer due to inadequate cold storage, transportation infrastructure, and intermediary inefficiencies. For instance, if farmers receive ₹10,000 per quintal for fruits and vegetables, consumers may pay ₹20,000 per quintal due to structural bottlenecks.
Classification Based on Rate and Intensity
Creeping Inflation (Mild Inflation)
Creeping inflation represents a gradual increase in prices, typically less than 3% annually. This moderate level is often considered beneficial for economic growth as it encourages consumption and investment without causing significant economic disruption.
Walking Inflation (Trotting Inflation)
Walking inflation occurs when prices increase at a moderate pace, generally between 3% to 10% per year. While manageable, this level requires monitoring to prevent acceleration into more problematic ranges.
Galloping Inflation (Running Inflation)
Galloping inflation involves rapid price increases at double-digit annual rates between 10% to 100%. This level severely disrupts economic stability and requires strong monetary and fiscal intervention.
Galloping inflation is characterized by:
High risks in fixing contracts at nominal prices
Need for frequent wage indexation and price controls
Contracts often denominated in stable foreign currencies
Significant challenges for monetary authorities
Hyperinflation
Hyperinflation represents the extreme form where prices rise over 50% monthly or exceed 100% annually. This catastrophic scenario can lead to complete monetary system collapse and currency devaluation.
Notable historical examples include:
Germany’s Weimar Republic in the early 1920s with 30,000% monthly inflation
Zimbabwe’s crisis reaching an estimated 79,600,000,000% monthly in November 2008
Recent instances in Venezuela and other economically distressed nations
Classification Based on Market Characteristics
Open Inflation
Open inflation occurs when price increases are freely determined by market mechanisms without government intervention. Prices rise openly and are readily measurable through standard price indices.
Characteristics include:
No artificial price controls or subsidies
Market forces freely determine price adjustments
Accurate statistical tracking through consumer and producer price indices
Full perception of purchasing power erosion by economic agents
Suppressed (Repressed) Inflation
Suppressed inflation exists when governments implement controls to artificially constrain price rises despite underlying inflationary pressures. While prices appear stable in controlled sectors, imbalances accumulate beneath the surface.
Control mechanisms include:
Price ceilings and maximum price regulations
Rationing systems for essential goods
Government subsidies to maintain artificially low prices
Distribution controls and quantity restrictions
Consequences of suppressed inflation:
Black market emergence with prices above legal limits
Persistent shortages and queues
Accumulation of excess cash holdings and bank deposits
Eventual explosive price increases when controls are lifted
Specialized Types of Inflation
Core Inflation
Core inflation measures price increases excluding volatile food and energy components, providing insight into underlying long-term inflationary trends. The Federal Reserve and most central banks use core inflation as their primary policy target due to its predictive value.
Core inflation excludes food and energy because:
These sectors exhibit high price volatility due to weather, geopolitics, and speculation
Their price movements often represent temporary shocks rather than persistent trends
Core measures provide clearer signals for monetary policy decisions
Sectoral Inflation
Sectoral inflation focuses on price movements within specific economic sectors such as food, energy, housing, or services. In India, food inflation has been a persistent concern, with vegetables and pulses contributing significantly to overall price pressures.
Recent Indian data shows:
Vegetables and pulses, despite holding only 8.42% weightage in the CPI basket, contributed 32.3% to overall inflation in FY25
Excluding vegetables and pulses, average headline inflation would be 1.7% lower
Core inflation (excluding food and energy) increased to 4.5% in September 2025, primarily due to precious metal price increases
Stagflation
Stagflation represents the unusual combination of high inflation with economic stagnation and high unemployment. This phenomenon poses particular challenges for policymakers as traditional anti-inflation measures may worsen unemployment.
Stagflation characteristics:
Simultaneous occurrence of inflation and recession
High unemployment despite rising prices
Limited effectiveness of conventional monetary policy tools
Central banks face a policy dilemma where raising interest rates to combat inflation may increase unemployment further
Contemporary Inflation Dynamics
Wage-Price Spiral Risks in Modern Economies
Recent research indicates that wage-price spiral risks remain contained despite high inflation in many economies. Three factors contribute to this containment: external shocks to inflation, falling real wages helping reduce price pressures, and aggressive monetary policy tightening by central banks.
Modern wage dynamics differ from historical patterns due to:
Reduced prevalence of automatic wage indexation systems
Decreased formal mechanisms maintaining relative wages across industries
Less centralized wage-setting arrangements compared to previous decades
Lower inflation expectations anchored by credible central bank policies
Inflation Expectations and Adaptive Behavior
The role of inflation expectations has become crucial in determining whether temporary price shocks evolve into persistent inflation. Fully adaptive expectations, where current inflation influences future wage and price decisions, can lead to self-reinforcing inflationary cycles.
Modern economies benefit from:
Better-anchored inflation expectations through central bank credibility
Forward-looking rather than purely backward-looking wage negotiations
Improved communication of monetary policy intentions
