There are three major types of inflation
1)Demand Pull Inflation
2)Cost Push inflation
3)Built in Inflation
Demand Pull Inflation:- Demand Pull Inflation caused by increase in aggregate demand due to increased private and government spending. It occurs when aggregate demand exceeds aggregate supply which increases costs suddenly. To increase the output firms employ more people. When firms employ more and more people they end up in increasing cost of production of the good as compared to the output .This results in increase in price of the good and hence Inflation.
Cost Push Inflation:- Cost supply inflation is also termed ‘supply shock inflation’. Caused by drops in aggregate supply due to increased prices of inputs. For example sudden decrease in the supply of oil would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. If the good whose price increases is used widely in production the effect is much more and causes inflation.
Built in Inflation:- These types of Inflation are induced by adaptive expectations i.e. the workers try to keep their wage levels high in anticipation of inflation. The employers and firms increase the prices of their goods in anticipation of the workers demands. This forms a vicious circle and results in increase in general level of prices. This results in Inflation.