At its most basic level, inflation is a general increase in prices across the economy and is well-known to all of us. After all, who among us has not reminisced about cheap rents of the past or how little lunch used to cost? And who has not noticed prices on everything from milk to movie tickets creeping upward? In this article, we explore the major types of inflation and touch upon the competing explanations offered by different economic schools.
Stagflation and Hyperinflation: Two Extremes
Although as consumers we may hate rising prices, many economists believe a moderate degree of inflation is healthy for a nation’s economy. Typically, central banks aim to maintain inflation around 2% to 3%. Increases in inflation significantly beyond this range can lead to fears of possible hyperinflation, a devastating scenario in which inflation rises rapidly out of control.
Also known as deflation, negative inflation occurs when prices drop for various reasons. Having a smaller money supply increases the value of money, which in turn decreases prices. A reduction in demand either because there is too large of a supply or a reduction in consumer spending can also cause negative inflation.
Source : Investopedia