Inflation may be classified on the basis of factors inducing or causing rise in prices, such as, (a) wage-induced, (b) profit-induced, (c) scarcity-induced, (d) deficit-induced, (e) currency-induced, () credit- induced, and (g) foreign trade-induced inflation.
1. Wage-Induced Inflation:
When inflation rises due to a rise in wages, it is called wage-induced inflation. In modern times, trade unions are able to secure higher wages for workers unaccompanied by a simultaneous increase in labour productivity. This increases the cost of production, and, in turn, the price level.
2. Profit-Induced Inflation:
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If the producers, due to their monopoly position, tend to mark-up their profit margin, it will lead to profit-induced inflation. Higher profits raise the cost of production which, in turn, pushes up the prices.
3. Scarcity-Induced Inflation:
When the supply of goods does not increase on account of natural calamities, the prices tend to rise. This may be called scarcity-induced inflation.
4. Deficit-Induced Inflation:
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When a government covers the deficit in its budget through creating new money (a method known as deficit financing), the purchasing power of the community increases without a simultaneous increase in production.
This leads to a rise in the price level which is referred to as deficit-induced inflation. Deficit-induced inflation is more common in less developed countries, where, due to lack of adequate resources, the government resorts to deficit financing to finance its development plans.
5. Currency-Induced Inflation:
When the supply of money exceeds the available output of goods and services, it leads to an inflationary increase in prices. This is a case of currency- induced inflation.
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6. Credit-Induced Inflation:
When prices increase on account of an expansion of credit without increasing the quantity of money it is known as credit-induced inflation.
7. Foreign Trade-Induced Inflation,
(a) When a country experiences a sudden rise in the demand for it’s exportable against the inelastic supply of exportable in the domestic market, this increases the demand and price level at home,
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(b) Trade gains and sudden inflow of exchange remittances increase the demand and prices in the domestic market. Both these factors lead to foreign trade-induced inflation.