What are Different Types of Inflation?
There has been plenty of talk as of late about the hardships that are caused by inflation. This has been the flashpoint for many political battles and debates between policymakers over what is the best course of action to deal with inflation. However, not all inflationary environments are the same. In fact, there are three different types of inflation: demand-pull inflation, cost-push inflation and built-in inflation.
What exactly is inflation?
Essentially, the phenomenon known as inflation is when a currency’s ability to purchase goods and services is diminished by various macroeconomic factors. Economists usually measure inflation by looking at the increases in price of goods and services. There are many different types of inflation measures which economists use, but generally whatever measure is utilized will look at the price increase in a specific group of services and goods over a certain period of time. Economists will compare this rate of increase to the rate of increase in previous periods.
The following are various types of inflation.
This type of inflation is caused by an oversupply of money and credit in the financial system of a particular country or region. With demand-pull inflation the supply of money and credit outstrips the pace of production capacity of the specific economy. When consumers have more money they feel more confident to increase their spending. This results in demand being higher than the economy’s ability to create supply, resulting in higher prices.
Price increases that materialize via inputs into the production process is known as cost-push inflation. Basically, the additional money and credit supply is utilized to purchase commodities and invest in other asset markets which results in increasing costs of intermediate goods. For example, an expansion in money supply may result in investors buying oil in the commodity markets which can cause the price of energy for consumers to increase. This in turn can result in high consumer prices for various products and services that require use of energy as an input.
This type of inflation stems from people’s expectations of future inflationary trends. When people believe that the price of goods and services will continue to increase they may demand higher wages to maintain their current living standards. Since wages are an input for many goods and services, this will put upward pressure on prices for consumers which results in higher demand for wage increases. This cyclical pattern is referred to as a wage-price spiral.
What to do about inflation
Inflation can be problematic for consumers as well as investors. Consumers may find that prices for goods and services are becoming too expensive to maintain their living standards. This may require you to implement a comprehensive personal financial plan and budget. Investors may also have to make adjustments to their investment strategies to better hedge against inflation. Whether you are a consumer needing to create a budget or an investor looking to adjust your investment strategy, a professional financial advisor will have the tools and knowledge to assist.
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