bINFLATION

Inflation is persistent rise in general price level.

A temporary rise in the prices will not be regarded as inflation, for example if prices
increase on the occasion on Eid or Christmas it will not be regarded as inflation, thus
we conclude that a one time price rise will not be considered as inflation. For a price
rise to be inflation it has to be persistent/consistent and continuous.
In order to understand the idea of inflation in more details we shall have a look at
types of inflation:
TYPES OF INFLATION
Here in this context, we shall talk about
• • Demand- pull inflation
• • Cost- push inflation
• • Wage- push inflation
• • Imported inflation

1. 1. It is that part of inflation which is brought about by an increase in the

aggregate demand (govt. spending would also be part of aggregate demand)
Aggregate demand = C + I + G
How does aggregate demand increase?
Aggregate demand in an economy may increase, for example, due to
I. I. Printing of new currency notes by govt. (when more money is
pumped in the economy the aggregate demand will increase)
II. II. Conspicuous consumption – it means spending just to show-off,
aggregate demand would increase and cause demand-pull inflation.
1. 2. It is that part of inflation which is brought about by a rise in cost of
production, when cost of production increases it will cause a rise in the prices
of the commodities in the market. Cost of production might increase because
of an increase in the price of raw materials, machinery, fuel, etc. A rise in
labor/wages would also reflect in the price level. cost of selling – the costs
incurred on marketing or selling your product.

COST OF SELLING
It is the cost incurred on selling the commodities by the producer, it may come
off as publicity or ads, it might also include the salaries of the staff employed
for the sale of commodities.

1. 3. It is in fact a part of cost-push inflation. We may say that wage push

inflation is equal to that part of cost push inflation which comes up due to rise
in the wages of labor.
2. 4. International/imported inflation is caused by a rise in prices in the
international market. When prices go up in the foreign countries and we
import certain goods from there, it will have an effect on the inflation in our
country also.
If we import raw materials and machinery, it will raise our cost of production
and practically, we are importing inflation from the international market.
Similarly, we also import consumer goods from the international market thus a
rise in the international prices is reflected into our domestic price level and the
situation of inflation is further aggravated