3. Types of Inflation (based on causes)

Demand Pull Inflation: This type of inflation is caused by increase in demand and when the demand in the economy outgrows the supply in the economy. This kind of inflation can be described by “too much money chasing too few goods”. One of the reasons for demand pull inflation can be the increase in money supply, by way of increased salary, increased government expenditure etc.

Cost-push inflation: It is also referred to as supply shock inflation. Such inflation occurs due to reduced supplies because of increased prices of inputs. For example, an increase in price of international crude oil adversely affects the inputs of almost all the items in a country like India, which neither has alternatives to oil for energy needs nor has significant amount of domestic oil production.

Structural Inflation: This type of inflation is also called as bottleneck inflation. Such an inflation is built into the economic system due to government policies. Such inflation occurs from time to time because of weather and seasonal conditions or due to supply side constraints, leading to shortage of supply in goods and services. Inflation in India is largely due to structural factors. For example, large number of intermediaries between farmer and final consumer in India; changing dietary patterns without commensurate increase in the supply of demanded goods.