Deflation and Other Types of Inflation
Inflation is defined as a sustained increase in the general level of prices for goods and services; deflation is the opposite of inflation, and refers to situation where there is decline in general price levels.
Thus, deflation occurs when the inflation rate falls below 0%. Deflation increases the real value of money and allows one to buy more goods with the same amount of money over time.
Deflation can occur owing to reduction in the supply of money or credit. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Disinflation refers to a slower rate of inflation. The biggest difference between disinflation and deflation is that in case of the former, the prices do not fall.
Unlike deflation, disinflation is considered a positive sign. But disinflation without economic growth can be a cause for worry.
Stagflation refers to economic condition where economic growth is very slow or stagnant and prices are rising.
The side effects of stagflation are increase in unemployment accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn’t growing but prices are going up.
This is the inflation rate that excludes temporary “volatile” factors, such as energy and food prices.
Headline inflation refers to inflation including commodities such as food and energy prices which tend to be more volatile and prone to inflationary spikes.
Skewflation refers to the skew in inflation where, prices of some items rise very fast while others are constant or might even be decreasing.
The term appeared in Economic Survey 2009-10 describing the Indian inflation scenario in financial year 2009-10 when core inflation remained negligible while food inflation was high.
One silver lining of such skewflation is that, unless one injects excessive demand into the economy through lax monetary policy, they do not last long.
Low Inflation/Creeping Inflation
This is an inflation that is slow and on predictable lines. This inflation takes place in a longer run and the range is generally in a single digit.
Galloping inflation is a very rapid inflation running in the range of double digits or triple digits. It is also known as Hopping Inflation, Jumping Inflation or Running Inflation. It was experienced in South American countries in 1970s and 1980s.
Hyper inflation is an inflation which is large and accelerating, which might have annual rates in millions. In such case, not only the increase is very large, but it takes place in a very short span of time.
For instance, Germany, after World War I, experienced such inflation; while Bolivia experienced it in mid-1985. Such inflation quickly leads to a complete loss of confidence in the domestic currency and people start opting for other forms of money.
This takes place when the supply falls drastically and the demand remains at the same level. Such situation arises due to supply-side accidents, hazards or mismanagement, which is also called Structural Inflation.
Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy (specifically price level) back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation, which seeks to return the economy back down to the long-term trend.