Definition of Inflation:

           It is a situation where there is a continuous or persistent increase in the general prices of goods and services either caused by excess aggregate demand over supply or an increase in the cost of production. Inflation occurs when the value of money is falling due to rising prices.

Types of inflation according to causes

                There are two types of inflation according to their causes namely demand inflation and cost inflation.

1. Demand Inflation

               This is a type of inflation which occurs when there is a continuous or persistent increase in the general prices of goods and services caused by excess aggregate demand over supply.

It is a situation where there is too much money chasing fewer goods in an economy. It is also called demand pull inflation or buyer's inflation.

         Causes of Demand Inflation

1. Excessive borrowing: When the government borrows much money and the populations are not able to produce goods to meet up with the money borrowed, it will cause inflation because there will be too much money chasing fewer goods.
2. Outbreak of War: During war period some industries divert from the production of goods to the production of war equipment. Production of goods is halted due to instability. After the war, if the amount of money in circulation remains the same, it will cause inflation.
3.  Bad Weather Condition: When the weather is unfavourable, less goods will be produced and if the supply of money remains the same, it will cause inflation because there will be too much money chasing fewer goods.
4. Budget Deficit: When the government budget for a deficit, the expenditure will be more than income (G>T) and if the amount of money in circulation remains the same it will cause inflation.
5. Export Surplus: when the government wants to achieve an export surplus, she will export more and import less, and if the supply of money remains the same it will cause inflation. Also, excess export increases the amount of money in circulation.
6. Reduction in taxation: Reducing taxes without corresponding increases in the volume of goods and services produced within an economy will cause demand pull inflation.
7. Increase in consumption: When consumption increases through increased income without corresponding increase in the availability of goods and services, prices will rise, leading to demand pull inflation.

                        Remedies to Demand Inflation

                   Any measure aimed at reducing excess aggregate demand in an economy will reduce demand pull inflation. Such measures may include the following,

1. Fiscal policy instruments: Through this policy, the government should plan for a budget surplus if she wants to reduce demand inflation. Similarly she can also increase direct taxes e. g. Income tax to reduce disposable income. This will reduce the amount of money circulation.
2. Contrationary monetary policy: Contrationary monetary policies such as increasing minimum lending rate, increasing special deposit, selling securities through open market operation, increasing cash ratio etc. will help reduce the amount of cash available to consumers in the economy. Once people's purchasing power is reduced, the demand inflation will reduce.
3. Direct control (physical policy): This measure involves direct intervention in the economy in the form of rationing and price control. The government may set a limit to the quantities of a given good which a consumer may buy at a particular price and time or will fix maximum prices of raw materials or finished goods to control inflation.

2. Cost Inflation

             It is a type of inflation which occurs when there is a continuous or persistence increase in the general prices of goods and services due to increase in the cost of production. It is also called sellers inflation or cost push inflation because it is an increase in cost of production pushing price upward.

            Causes of cost Inflation

1. An increase in the cost of raw materials: An increase in the cost of raw materials will increase cost of production. The producer could then transfer the cost to the consumers in the form of higher prices. When this persists, it would lead to cost inflation.
2. An increase in indirect tax: When the government increases indirect taxes, it will increase cost of production. This reduces profit margin and some producers can only survive by increasing prices that could lead to cost inflation.
3. Trade union wage claim: When the trade union demand higher wages for their workers and the firms are not able to produce enough goods to meet up with increase in their wages, it will increase cost of production that may cause inflation.

                      Remedies to Cost Inflation

1. The government should reduce indirect taxes. This will reduce cost of production to the producer and encourage supply to increase.
2. Government should give subsidies to producers. Subsidies reduce the cost of production and hence prices of final output.
3. Weakening of trade union abilities to demand for wage claim. This may involve maximum wage legislation through the parliament.
4.  Encourage the formation of small firms to increase production of goods and services.
5.  By using income policy such as wage freeze, (to make income stagnant for some time), delay in promotion, etc in order to reduce cost of production.

     Other types of inflation

Stagflation: It is a situation which occurs when there is a high rate of inflation co-existing with high rate of unemployment. Stagflation is stagnant economic growth, high unemployment and high inflation. It is unusual situation because inflation is not supposed to occur when the economy is weak

Slumpflation: It is a situation which occurs when there is a high rate of inflation existing during a period of unemployment and economic depression. It is a period of combined economic decline and rising inflation.

Hyperinflation: It is a type of inflation where the price increases are so out of control that the concept of inflation is meaningless. It however occurs when excessively high prices cause remarkable socio-economic and political problems in the country. It is also called runaway or galloping inflation.

Suppressed inflation: It is a type of inflation which occurs when the rate of increase in prices is suppressed by the government through price control and rationing. Prices, increase within a manageable range.

Implicit or hidden inflation: This type of inflation occurs when the producers maintain the price level for their product but reduces the quality. In this case consumer's expenditure increases.

Creeping inflation: It is a type of inflation which occurs when the general price level of goods is increasing at a very slow rate that it may go unnoticed.

                            Effects or Consequences of Inflation

1. On income distribution: during inflation there will be uneven distribution of income. Fixed income earners will lose while variable income earners will gain during inflation.
2. On the value of money: The value of money will fall during inflation. This is because of rising priced. This would lead to a fall in the standard of living.
3. On debtors and creditors: During inflation, debtors will gain and creditors will lose
4. On export and import: There will be less export and more import of goods and services during inflation.
5. On balance of payment: Balance of payment will be unfavorable because of less export and more importation of goods and services. This is because people spend more money on importing goods.
6. On saving: Citizens will be struggling to meet up with basic consumption because of a fall in the value of money-Increase spending on consumption reduces the amount of savings.
7. On investment: Demand inflation encourages investment while cost inflation may discourage investment. This is because demand inflation creates potential demand for businesses that can be exploited through new investments.

On cost of production: The cost of production will be high if ii is cost inflation and cost of production will be low if it is demand inflation because there is high purchasing power.