This article will help you to learn about the difference between open inflation and suppressed inflation.
Difference between Open Inflation and Suppressed Inflation
Inflation is sometimes classified into two types — open inflation and suppressed inflation.
Inflation is said to be ‘open’ when the government and the monetary authorities of a country do not take any measure to control the spending of the people. The people spend their increased incomes freely. As a result there occurs a sharp rise in demand and prices. If the people are allowed to spend their larger incomes on goods freely, prices will continue to rise sharply.
And if prices are allowed to rise freely, an open inflation in course of time may develop into a galloping inflation (or hyper- inflation) when prices rise very fast. At the later stage of open inflation, the price-rise becomes very rapid due to an increase in money supply or due to an increase in the rates of wages. Such a kind of inflation occurred in Germany in the years of 1920-23.
Inflation, on the other hand, becomes suppressed or repressed when the government and the monetary authorities do not allow the prices to rise to a high level. For many reasons they take measures to control the spending of the larger incomes through various methods, such as price control and rationing of consumption in respect of some essential goods, control of investment expenditures and others.
Repressed inflation refers to the state of a set of markets or an economy in which there is persistent excess demand for goods and services. If prices are below their market-clearing levels, demand will outweigh the available supply; this should drive prices up, causing Inflation.
If, however, prices are prevented from rising, for example, because of price controls inflation can be prevented but consumers will not be able to obtain as much of things as they want. Features of markets suffering from repressed inflation will thus be queues price-control-cum-rationing and constant shortages and black markets.
During suppressed inflation as the spending and demand are controlled, prices do not rise in the controlled sector but do rise in the uncontrolled sector. Besides, the other symptoms of inflation are found in the economy. These symptoms are the accumulation of larger cash balance at hands, the increase in bank deposits, the larger volume of liquid assets or redundant money and others.
Such ‘redundant money’ or ‘potential demand for goods’ which, if unleashed, would create active inflation. Such a development is described as ‘repressed’ or ‘suppressed’ inflation. Nowadays, we find mostly this suppressed type of inflation.
Effects of Suppressed Inflation:
Regarding the effects of suppressed inflation it can be said that it discourages the people to work hard and to earn more as they cannot spend their incomes on desired goods and services freely. Besides, the people begin to buy undesired goods in the absence of a sufficient quantity of desired goods whose supply is under government control. Finally, it can be said that the price control and rationing of essential goods gives rise to the emergence of black marketing and of profiteering in these goods.