Types of Inflation

Abstract

The focus of this book is on demand inflation. Demand inflation can be defined as rising prices due to generalised excess demand in the product market associated with plans to invest in excess of plans to save. We have argued that excess demand in this sense is likely to be a typical characteristic of developing economies. Excess demand is not the only cause of inflation, however. Inflation may emanate from a number of different sources other than excess demand in the product market. In particular: prices may rise because prices are based on costs of production and costs rise; prices may rise because of shifts in demand from one sector of the economy to another and prices are more flexible in the upward direction than in the downward direction; and prices may rise in a self-reinforcing way because of a loss of confidence in money and the development of a wage-price spiral.