Stagflation Concept

Stagflation Concept

Stagflation means mean high unemployment rate with high rate of inflation .it means that there is situation where price is rising and at the same time unemployment is also rising.

Stagflation Causes

1.    High Wage Rate

Stagflation causes include the shortage of supply. There are two major causes of shortage of supply i.e. increase wage rate and increase in taxation by government. Increase wages will force firms to reduce the production due to high production cost. Therefore for reduced production not only raise the price but creates unemployment.

2.    High Tax Rates

Similarly increase in indirect taxes also raise the cost of production and therefore firm are forced to reduced the production due on enhanced cost of production and such reduction will create shortage of supply on one hand and unemployment on other hand.

Stagflation Controlling Measures

1.    Wage Control

Stagflation control measure includes minimum wage control;

2.    Tax Reduction

Stagflation may also be controlled by different tax related measure on the wages. Stagflation may also be controlled by reducing business taxes.

Types of inflation

Types of inflation in term of reasons

There are two famous types of inflation i.e. demand Pull & cost push inflation. However, inflation can also be categorized in term of pace of rising prices i.e. creeping inflation, walking inflation, running inflation, hyper inflation.

1.    Demand Pull Inflation

Demand pull inflation is a situation, where demand of goods is raised at the level of full employment, and this situation will create demand pull inflation. Because at full employment level the supply is constant and in fact full employment level is represented by the horizontal supply curve.

2.    Cost push inflation

Price may rise due to rise in production cost. It is obvious that producer would sell good price at higher prices in case of high production cost. In this type of inflation on one hand prices are rising and on other hand unemployment rate in increasing due to cut down in supply due to high production cost.

Types of inflation (in Terms of Pace of rising prices)

1.    Creeping Inflation Definition

Creeping inflation is that form of inflation in which prices increases at slow pace. In general the inflation below 3% is known as creeping inflation. Economist regards creeping inflation safe for the economy. Creeping inflation is essential for growth of economy and economy will be stagnant in absence of creeping inflation.

2.    Walking Inflation Definition

Walking inflation is moderate rise in price level. Inflation rate between 3% to 7% is regarded as walking inflation. This range can be extended to 10%, therefore safely we can say that inflation between 3 to 10 are walking inflation. Walking inflation is regarded as warning signal for controlling measures.  If control measures are not adopted then inflation will turn into running phase (rapid rise in prices).

3.    Running inflation Definition

Running inflation is a stage of inflation where general price level i.e. inflation rises at rapidly. Economist considered inflation between 10% - 20% as running inflation. If inflation is not controlled in this stage, then next stage is hyperinflation which is considered to disaster for economy.

4.    Hyper inflation Definition

Hyper inflation is very high level of inflation i.e. prices are rising at a rate above than 20%. In hyper inflation prices are increasing on daily bases and speculation in the market at peak. Hyper inflation other name are Galloping or runaway inflation

Reasons of inflation

Reasons of inflation

Situation of rising prices is known as inflation, and factor influences such rise are known as causes of inflation. There are number of causes for inflation in economy.

1.    Population is Rise

Population rate in the country may be a reason for inflation. It means that many people are chasing limited goods.   Country economy is not growing with the same pace as population. Such population can be controlled by reducing population growth.

2.    Money Supply

Money supply in the country plays a key role in increase of inflation. In old days this was regarded as only reason for inflation. Government monetary policy tool to control the money supply in the country. Contractionary policy is used to control the inflation in the country.

3.    Supply Shortages

Supply shortages may be a reason for inflation in the country. Sometimes producer use this tool (shortage of supply) to increase the price for profit maximization.  However, there may be real shortage of supply. There are number of reason for shortage of supply i.e. increases demand, natural disaster, and rise in cost of production.

4.    Increase in Production Cost

Prices will rise due to increase in production cost in the country. For example if the wage rate is increase due to demand of trade union, then prices of goods will follow this increase. Producer will increase the price to secure the desired profit levels. This type of inflation is known as cost push inflation.

5.    High Public Expenditure

High public expenditure will also create a lot of demand in the country, and supply may not be available to meet this demand, therefore expansionary fiscal policy (high public expenditure) will create a pressure on prices.

6.    Increase in Disposal income

Increase in income level of the people will also increase consumption & investment in the country. Therefore increase prices of factor of production may also results in inflation. It is important to note that increase income will effect inflation in two way cost push inflation & demand pull inflation.

7.    Black Money

Black money may be a reason for high inflation rate; easy coming easy going rule is applicable in case of black money. If there is a lot of black money in the economy, it will raise the demand for good, especially luxury goods and thus a pressure on price will create.

8.    Obsolete Method of Production

Out dated technology and use of obsolete production process also results in cost push inflation. Thus inflation can be controlled by improving & introducing modern production techniques & methods.