Inflation can be broadly identified as a continues increase in the general price levels of a give country, over a certain period of time (relatively longer durations or period of time and countries in general price levels).
In simple terms it is the persistent rise in the general price levels. However a temporary price increase or an increase in the prices of a few goods will not amount to inflation. Such situations will not amount to inflation since even though the prices of some goods may increase the prices of other good may decrease causing no lasting effect to the general or average price levels.
A continues decrease in the general price levels over a period of time will be identified as a situation of deflation. Inflation and deflation will inevitably affect the economic stability or in other words leads to Economic instability, as it would hider the performance of an economy.
Inflation is measured using a combination of different price indices. The rate or percentage of the increase in general price levels of a current year in comparison to the previous year’s values. This is identified as the inflation rate.
In simple terms this is the creation of a general price which is actually lower that the actual market price that should exist within a country through the interactions of market forces (supply and demand), due to government regulations.
A government will mainly practice market intervention methods such as, price fixing, product rationing and fixing wage rates, etc.
A low level of inflation that exists with the economy over a period of time is identified as creeping inflation. In a given economy if the annual inflation growth rate of general price levels are less than 5% it is considered that such an economy is faced with Creeping Inflation. Creeping Inflation however does not create any adverse effect to an economy therefore need not be strictly regulated.
A rapid or very fast increase in a country’s general price levels over a period of time is known as either Galloping Inflation or Runaway inflation. Certain economists also identify it as Strationflation. In such situations a given economy can experience inflation rates that range from about 10% to several hundred percent. This causes severe consequences for an economy and makes government intervention essential.
This is a spiral or cycle inflationary situation that occurs when there is an increase in general a price levels during a given period of time. In an inflationary situation as such businesses will thrive with increased amounts of profits which will lead to an increase in the demand for factors of production (land, labour, capital and entrepreneurship), which in turn will increase the prices of production factors (rent, wages and interest) leading toward an increase in the cost of production causing further inflationary pressure. This continuation of the cyclical or spiral like process brings about Spiral Inflation.