There are several ways of defining inflation. In some contexts it refers to a steady increase in the supply of money. In others it is seen as a situation where demand exceeds supply. It seems best, however, to define inflation as a situation in which the general price level is constantly moving upwards.

In the extreme form of inflation, prices rise at a phenomenal rate and terms such as hyperinflation, run-away inflation, or galloping inflation have been used to explain the situation. Germany experienced this kind of inflation in 1923 and by the end of that year prices were one million times greater than their pre-war level. Towards the end of 1923, paper money was losing half or more of its value one hour, and wages were fixed and paid daily.

Under conditions of hyperinflation people lose confidence in the currency's ability to carry out its functions. It becomes unacceptable as a medium of exchange and other goods, such as cigarettes, are used as money. When things have become as bad as this the only possible course of action is to withdraw the currency and issue new monetary units.

Another type of inflation is described as suppressed inflation. This refers to a situation where demand exceeds supply, but the effect on prices is minimized by the use of such devices as price controls and rationing. The excess demand still exists and it will tend to show itself in the form of waiting lists, queues, and black markets.

The most common type of inflation is creeping inflation where the general price level rises at an annual rate between 1 and 6 percent.