Inflation is classified on the basis of the process through which it is induced. Under this category, there are a) deficit induced inflation; b) wage induced inflation; c) profit induced inflation etc. When it comes to deficit induced inflation, this is caused by the adoption of unbalanced budgetary policies. The government would resort to deficit financing which means government spending in excess of its revenue receipts. When the economy is not capable of sustaining the extra resource released by the government, prices will rise and inflationary situation will occur. Persistent deficit financing policies will aggravate the situation and it may lead to an inflationary spiral. b) Wage induced inflation: This denotes a rise in prices due to an increase in money wages. A small general increase in the price level may induce the labor organizations to clamour for more wages or any change in the monetary or fiscal policies of the government resulting in increase of price level will make the laborers demand more wages.
When the increase is conceded through budgetary deficits, it will lead to a further increase in prices. The trade union organizations will again demand more wages. In the absence of linking productivity with increased wages, the increase will be only a money increase and this will lead to inflationary conditions in the economy. Profit induced inflation: This occurs on account of increase in the profits of manufacturers. This is possible when there is a general increase in the price level or an increase in the price level of new capital goods. This will enhance the profits of producers and the result will be profit inflation. The different causes inducing inflation should not be considered in isolation. One cause will be the contributory factor to another cause leading to an inflationary condition in the economy. On the basis of time:
Emergencies like war or preparation for war will create an inflationary condition in the economy. Sudden launching of war will strain the economy, as all the factor resources have to be pooled for war purposes. The government would resort to deficit financing and there will be massive expansion of money supply for producing materials and ammunitions for war, besides food for defence personnel and also for the people. The sudden upsurge in economic activity and rising prices will induce all producers big and small, to take up investment and production. This will generate inflation, as all commodities will become scarce due to their diversion to war purposes.
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