Inflation is when the prices of goods and services increase. There are four main types of inflation, categorized by their speed: creeping, walking, galloping, and hyperinflation. There are also many types of asset inflation and, of course, wage inflation. Many experts consider demand-pull and cost-push to be types of inflation, but they are actually causes of inflation, as is expansion of the money supply.
1. Creeping Inflation: Creeping or mild inflation is when
prices rise 3% a year or less. According to the U.S. Federal Reserve, when
prices rise 2% or less, it's actually beneficial to economic growth. That's
because this mild inflation sets expectations that prices will continue to
rise. As a result, it sparks increased demand as consumers decide to buy now
before prices rise in the future. By increasing demand, mild inflation drives
economic expansion.
2. Walking Inflation: This type of strong, or pernicious,
inflation is between 3-10% a year. It is harmful to the economy because it
heats up economic growth too fast. People start to buy more than they need,
just to avoid tomorrow's much higher prices. This drives demand even further,
so that suppliers can't keep up. More important, neither can wages. As a
result, common goods and services are priced out of the reach of most people.
3. Galloping Inflation: When inflation rises to ten percent
or greater, it wreaks absolute havoc on the economy. Money loses value so fast
that business and employee income can't keep up with costs and prices. Foreign
investors avoid the country, depriving it of needed capital. The economy
becomes unstable, and government leaders lose credibility. Galloping inflation
must be prevented.
4. Hyperinflation: Hyperinflation is when the prices
skyrocket more than 50% a month. It is fortunately very rare. In fact, most
examples of hyperinflation have occurred when the government printed money
recklessly to pay for war. Examples of hyperinflation include Germany in the
1920s, Zimbabwe in the 2000s, and during the American Civil War.
5. Stagflation: Stagflation is just like its name
says: when economic growth is stagnant, but there still is price inflation.
This seems contradictory, if not impossible. Why would prices go up when there
isn't enough demand to stoke economic growth? It happened in the 1970s when the
U.S. went off the gold standard. Once the dollar's value was no longer tied to
gold, the number of dollars in circulation skyrocketed. This increase in the
money supply was one of the causes of inflation. Stagflation didn't end until
then-Federal Reserve Chairman Paul Volcker raised the Fed funds rate to the
double-digits -- and kept it there long enough to dispel expectations of
further inflation. Because it was such an unusual situation, it probably won't
happen again.
6. Core Inflation: The core inflation rate measures
rising prices in everything except food and energy. That's because gas prices
tend to escalate every summer, usually driving up the price of food and often
anything else that has large transportation costs. The Federal Reserve uses the
core inflation rate to guide it in setting monetary policy. The Fed doesn't
want to adjust interest rates every time gas prices go up -- and you wouldn't want
it to.
7. Deflation: Deflation is the opposite of
inflation -- it's when prices fall. It's caused when an asset bubble bursts.
That's what happened in housing in 2006. Deflation in housing prices trapped
those who bought their homes in 2005. In fact, the Fed was worried about
overall deflation during the recession. That's because deflation can turn a
recession into a depression. During the Great Depression of 1929, prices
dropped 10% -- a year. Once deflation starts, it is harder to stop than inflation.
8. Wage Inflation: Wage inflation is when workers' pay
rises faster than the cost of living. This occurs when there is a shortage of
workers, when labor unions negotiate ever-higher wages, or when workers
effectively control their own pay. A worker shortage occurs whenever
unemployment is below 4%. Labor unions negotiated higher pay for auto workers
in the 90s. CEOs effectively control their own pay by sitting on many corporate
boards, especially their own. All of these situations created wage inflation.
Of course, everyone thinks their wage increases are justified. However, higher
wages are one element of cost-push inflation, and can cause prices of the
company's goods and services to rise.
9. Asset Inflation –
Housing: An asset
bubble, or asset inflation, occurs in one asset class, such as housing, oil or
gold. It is often overlooked by the Federal Reserve and other
inflation-watchers when the overall rate of inflation is low. However, as we
saw in the subprime mortgage crisis and subsequent global financial crisis,
asset inflation can be very damaging if left unchecked.
10. Asset Inflation –
Gas: Gas prices rise
each spring in anticipation of the summertime vacation driving season. In fact,
you can expect gas prices to rise ten cents per gallon each spring. However,
political uncertainty in the oil-exporting countries drove gas prices higher in
2011 and 2012. Prices hit an all-time peak of $4.17 in July 2008, thanks to
economic uncertainty. For more on that, see Gas Prices in 2008.
What do oil prices have to do with gas prices? A lot. In
fact, oil prices are responsible for 72% of gas prices. The rest is
distribution and taxes, which aren't as volatile as oil prices. For more, see
How Do Crude Oil Prices Affect Gas Prices?
11. Asset Inflation – Oil: Crude oil prices hit an all-time
high of $143.68 a barrel in July 2008. This was in spite of a decrease in
global demand and an increase in supply. Oil prices are determined by
commodities traders. That includes both speculators and corporate traders
hedging their risks. Traders will bid up oil prices if they think there are
threats to supply, such as unrest in the Middle East, or an uptick in demand,
such as growth in China.
12. Asset Inflation –
Food: Food prices
soared 6.8% in 2008, causing food riots in India and other emerging markets.
They spiked again in 2011, rising 4.8%. High food costs led to the Arab Spring,
according to many economists. Food riots caused by inflation in this important
asset class could reoccur.
13. Asset Inflation –
Gold: An asset
bubble occurred when gold prices hit the all-time high of $1,895 an ounce on
September 5, 2011. Although many investors might not call this inflation, it
sure was. That's because prices rose without a corresponding shift in gold's
supply or demand. Instead, investors drove up gold prices as a safe haven. They
were concerned about the declining dollar, hyperinflation in U.S. goods and
services, and uncertainty about global stability. What spooked investors? In
August, the jobs report showed absolutely zero new jobs gains. During the
summer, the euro zone debt crisis looked like it might not get resolved and
there was stress about whether the U.S. would default on its debt. Gold prices
go up in response to uncertainty, whether it's to hedge against inflation or
its exact opposite, the resurgence of recession.
Editor: Md. Mahbub Hussain
Associated by: Sumi Akther
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