What is Inflation? Types of inflation? How is it measured?

Discussion in 'Growing and Managing a Business' started by Nazreen, Apr 19, 2008.

  1. Nazreen

    Nazreen
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    In Singapore, it was reported that for 2008 as a whole CPI inflation is projected to come in at the upper half of the 4.5-5.5% forecast range. You might have heard news like this but really didn't know what inflation really means so you just didn't bother, right? Well, that's why I'm here. I'll try to explain inflation in the simplest way possible.

    With the definition above from Answers.com, if you're not in the business or financial industry you still might not be able to understand what inflation means. I guess the best way to explain inflation is giving an example.

    Now you know what inflation means. The value (or purchasing power) of our money has declined or depreciated!!!

    So how does this affect us? Well, I'm an independent financial adviser so I'll explain how inflation affects our retirement planning. Let's take for example my client, 25 year old Mr X.

    So there you have it. So if you hear that inflation rate is 3%, you would know that prices of goods and services would increase by 3% - meaning you have to pay 3% more. What's more worrying is if you hear that inflation rate has increased from 3% to 6%, because you'll be paying 6% more!!!

    Admin Edit: I've recently had someone write the article below that you might find helpful;

    Types of Inflation
    Please see descriptions of the major types of inflation below.

    Wage inflation - This is the typical situation in which supply exceeds demand (commonly referred to as the "demand-pull" occurrence, or "excess demand inflation"). When wage inflation occurs, the prices for the product or service increase, thus leading into the situation know as demand-pull. An example of this would be the dramatic changes in the economy during war.

    Pricing Power Inflation - Commonly known as the "Administered Price Inflation", this occurs when business and individuals raise their prices retrospectively to increase their profits. On a side note, pricing power inflation does NOT occur during economic depression or financial drops.

    Cost-Push Inflation - When an increase of price occurs in regards to the produce or maintenance of a service or product, the expected increase in price is the resultant effect. For an example, if a car manufacturer paid more for a vital part of an engine, the labour cost would decrease to counter the new price.

    Sectoral Inflation - This occurs when the price of one product directly affects the price of another product or service. For example, you take a daily bus to work. If the price of oil rose, the bus company would have to ensure that their profit margin was not lost by raising the fare for tickets. This type of inflation occurs generally across the retail aspect of the world, affecting prices when the production cost increases for example.

    Stagflation - The is the situation in which the inflation continues to rise despite the economy not following suit, in other words when prices rise even though the country is in recession. This type of inflation can have disastrous effects but is generally a short lived form of inflation as it could potentially lead to a financial crisis.

    In addition to the types of inflation described above there are also certain degrees of inflation, such as;

    Mild inflation being where there is a gradual but slow increase per annum in regards to the price. It can show the the economy is growing in size, thus generating more jobs.

    Strato-inflation can range from a low percentile to an extremely high percentile increase. Developing countries experience this, or have done in the past.

    Hyper inflation is an extremely accelerated form of inflation, occurring when the country imposing it is in desperate need of the money - either to pay debts, fund development and so on.
     
    #1 Nazreen, Apr 19, 2008
    Last edited by a moderator: Apr 22, 2011
  2. silent_thunder

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    okay yesterday I saw fergal explaining about stagflation I thought I can shre with you the general types of inflation after seeing that!!
    okay here is the thread!!

    In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is
    measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances. The most well known are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole economy.
    There are four main types of inflation with four different causes. The most important inflation is called demand-pull or excess demand inflation.

    It occurs when the total demand for goods and services in an economy exceeds the available supply, so the prices for them rise in a market economy. Historically this has been the most common type and at times the most serious. Every war produces this type of inflation because demand for war materials and manpower grows rapidly without comparable shrinkage elsewhere. Other types of inflation occur more readily in conjunction with demandpull
    inflation.



    Another type of inflation is called cost-push inflation. The name suggests the cause--costs of production rise, for one reason or another, and force up the prices of finished goods and services. Often a rise in wages
    in excess of any gains in labor productivity is what raises unit costs of production and thus raises prices. This is less common than demand-pull, but can occur independently as well as in conjunction with it.

    A third type of inflation could be called pricing power inflation, but is more frequently called administered price inflation. It occurs whenever businesses in general decide to boost their prices to increase their profit
    margins. This does not occur normally in recessions but when the economy is booming and sales are strong. It might be called oligopolistic inflation, because it is oligopolies that have the power to set their own prices and raise them when they decide the time is ripe. One can at such times read in the newspapers that business is just waiting a bit to see how soon they might raise their prices. An oligopolistic firm oftenrealizes that if it raises its prices, the other major firms in the industry will likely see that as a good time to widen their profit margins too without suffering much from price competition from the few other firms in the industry.

    The fourth type is called sectoral inflation. The term applies whenever any of the other three factors hits a basic industry causing inflation there, and since the industry hit is a major supplier of many other industries, as for example steel is, or oil is, that raises costs of the industries using say steel or oil, and forces up prices there also, so inflation becomes more widespread throughout the economy, although it originated in just one basic sector.

    wow!! finally its over!! but still its just the tip of the iceberg you need to also know about the indexes used to measure inflation..anyway it took me longer than I expected to complete this thread!! I hope its useful for all
     
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  3. Fergal

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    Thanks for sharing that with us Silent. It is a great overview on the different types of inflation.
     
  4. Nazreen

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    I've also created a thread before explaining Inflation in layman's terms. Please see this thread. My old thread didn't explain the four types of inflation though.

    Thanks for explaining these silent_thunder.
     
  5. Fergal

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    Thanks for the reminder Nazreen, threads merged.
     
  6. silent_thunder

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    oops!! sorry I didnt know that you already created the thread
     
  7. deepak_sharma

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    Thanks silent for explaining the basics of calculating the inflation . Seriously guys its an big issue which is affecting economies of many developing countries and the best example is India.Inflation in India this year reaches 12.2% which is by far above the expected inflation of 4.2%. Government is helpless because of increasing oil prices and are handicapped as they are unable to take any appropriate action regarding it...
     
  8. Fergal

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    That is a very high inflation rate for India. Is it causing difficulties for Indian based businesses who are exporting abroad?
     
  9. deepak_sharma

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  10. Fergal

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    Thanks for that Deepak, the falling dollar and rising costs of raw materials are definitely challenges for Indian businesses. Irish companies exporting to the US are facing the same challenges.
     
  11. Nazreen

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    I think that almost all countries have a higher inflation rate than as was projected by their goverments. In Singapore, it's not that bad. Our inflation rate is now around 6.8% which is higher than the projected rate of 6%. This is up from our an average of only 3%.

    It's not only businesses that suffers but also the normal workers. Prices of commodities and things that are needed for our daily living are increasing at a higher rate than our salaries. And to add to that, Singapore is one of the most expensive places to live in.
     
  12. silent_thunder

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    Singapore doesnt suffer as much as India because you dont need all that oil . India imports 70% of its oil so its very difficult to rein in the inflation when the oil prices shoot up, only countries which dont import oil have been spared of this inflation
     
  13. Fergal

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    Workers are also being hit with a double whammy. Prices are going up and it is much more difficult for them to get a pay rise because of the present economic conditions.
     

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