According to many classical writers, inflation is a situation when too much money chases too few

goods and services. Inflation is measured by the Consumer Price Index (CPI).

Therefore, there is an imbalance between the money supply and the Gross Domestic Product

(GDP). There are many types of inflation like demand-pull inflation, cost-push inflation, supplyside inflation. But Inflation can be divided into two broad types:

1. Open inflation – when the general price level in an economy rises continuously and

2. Repressed inflation – when the economy suffers from inflation without any apparent risein

prices.

According to Keynes, inflation is an imbalance between the aggregate demand and aggregate

supply of goods and services. Therefore, if the aggregate demand exceeds the aggregate supply,

then the prices keep rising.

Causes of Inflation

(a) Economic Causes

In an economy, when the demand for a commodity exceeds its supply, then the excess demand

pushes the price up. On the other hand, when the factor prices increase, the cost of production rises

too. This leads to an increase in the price level as well