On the basis of Government reaction, inflation can be open or suppressed.

1. Open Inflation:

If the government takes no steps to check the price rise and the market mechanism is allowed to function without any interference, it is called open inflation. Under open inflation, market mechanism performs the function of allocating scarce resources among competing industries.

If there is shortage of any particular resource, the market mechanism would raise its price and allocate it to those industries which can afford to pay a higher price for it. The hyper-inflation in Germany after the World War-I is an example of open inflation.


2. Suppressed Inflation:

If the government actively makes efforts to check the price rise through price control and rationing, it is called suppressed inflation. These measures can check inflation as long as their effect continues.

Once these measures are withdrawn, the demand for goods increases and the suppressed inflation becomes open inflation. Thus, suppressed inflation means to defer current demand or to divert demand from controlled goods to uncontrolled goods.

Suppressed inflation results in many evils, such as profiteering, black marketing, hoarding, corruption, etc. It also leads to the diversion of economic resources from more essential goods to less essential goods.