Inflation isdefined as an increase in the average level of prices. When the supply ofoutput is less, the rise in prices is described as inflationary. In Goulborn’swords, it is a case of “too much money chasing too few goods”. H.G. Johnsondefines inflation as “a sustained rise in prices”. Inflation is generallyassociated with an abnormal increase in the quantity of money resulting inabnormal rise in prices. Inflation thus, represents a situation whereby thepressure of aggregate demand for goods and services exceeds the availablesupply of output.

i)Causes of Inflation

a) Increase in demand and decrease insupply of goods cause inflation. Increase in demand is caused by increase inaggregate spending on consumption and investment goods. Decrease in output isdue to deficiency of capital equipment, scarcity of factors of production andnatural calamities like drought, flood, etc.

b) Inflation occurs during the war when the governmentcreates additional money and circulates the same into the economy to meet warexpenditures.

c) Also, when government resorts to deficit financing,inflation takes place.

d) Planning for rapid economic development is anothercause of inflation. Huge investments are made which would yield results onlyafter a period of five to ten years. This very long time lag between input andoutput results in inflation.

e) The activities of hoarders and speculators reducethe supply of goods to the market and push up prices.

f) The prevalence of black money or unaccounted moneyand also the existence of counterfeit money lead to inflation.

g) Demand-pull inflation: It refers to that rise in the price level, whichtakes place because consumers and investors with their rising income competewith each other for a relatively limited supply of available goods.

h) Cost-push Inflation: It refers to that rise in the price level,which takes place because wages increase to a greater extent than labourproductivity. These costs (wages) are passed on to the consumers in the form ofhigher prices.

ii) Types ofInflation: The classification ofinflation is based on the speed with which the price increases in the economy.

a) Creeping inflation: It is the mildest type of inflation, under whichprices rise slowly, say, one per cent perannum.

b) Walking inflation: When the rise in prices is more pronounced ascompared to a creeping inflation, it is called walking inflation. Roughly, theprices rise five per cent annually under this situation. 

c) When the movement of price acceleratesrapidly, “Runninginflation” emerges. Under this, prices rise by more than ten per cent per annum.

d)Hyperinflation: This is an alternativeterm for run away or galloping inflation. There is such a tremendous expansionin the supply of money and eventually it becomes worthless. Hyperinflationresults in a steep rise in prices (sometimes, the rise in prices is 100 percent or more) and it disrupts normal economic relations.

iii)Deflation: It is theopposite of inflation. It means a fall in the general price level associatedwith a contraction of the supply of money and credit.

iv) Effects of Inflation: The effects of inflation are felt unevenly bydifferent groups of individuals within the economy. Generally, inflationinflicts more harm on low and fixed income groups than high-income group ofpeople. Some of the important effects of inflation are given below:

a) Debtors gain and creditors stand to lose by inflation

b) When prices rise, producers,speculators and entrepreneurs gain because prices rise at a faster rate thanthe cost of production.

c) Property owners are benefited on account of increasing propertyvalue.

d) The hardest hit are those who earn fixed income. Persons who liveon post office savings, fixed interest and rent, pensioners, governmentemployees and so on suffer because their incomes do not rise in proportion torise in prices.

e) Distortion in production and allocation of resources take placesince producers prefer to produce goods consumed by the rich people.

f) Inflation results redistribution of wealth favouring businessmenand hurting consumers, creditors, small investors and fixed incomeearners. 

v)Control of Inflation: Thefollowing are the anti-inflationary measures:

(a) Monetary measures

1) The central banki.e., the Reserve Bank of India can increase the market rate of interest thatwill reduce the aggregate spending.

2) If the RBI canreduce the cash available to the banking system, the capacity of the banks tolend money to the borrowers will be reduced.

3) The RBI can sellthe Government securities to the banks or to the public so that cash availablewith bank or public can be reduced.

4) Consumer credit control can reduce money supply.

b) Fiscal measures

1) Reduction ofgovernment spending

2) Imposition ofnew taxes

3) Encouragementof savings or introducing compulsory saving schemes

c) Physical or Non-monetarymeasures

1)   Increasing output, increasing imports anddecreasing exports so as to increase the availability of goods which are inshort supply.

2) Controlling money wages to keep downcosts.

3) Price controland rationing.

4) Control over speculation, hoarding andblack-marketing.

5) Import of essential commodities anddistribution of such goods through fair price shops.

The monetary and fiscal measures will reduce the moneysupply in the country, whereas the physical and non-monetary measures willincrease output and control pricesof goods. Thus, inflation can be gradually controlled.