Different Types of Inflation (2)

There are other forms of inflation like those based on their causes like demand-pull inflation and cost-push inflation as well others based on the state of the economy. Here are some more forms of inflation you should be wary of:

In our last post, we considered the four types of inflation based on speed, namely, creeping inflation, walking inflation, galloping inflation and hyperinflation.

There are other forms of inflation like those based on their causes like demand-pull inflation and cost-push inflation as well others based on the state of the economy. Here are some more forms of inflation you should be wary of:

Demand-pull Inflation

The forces of demand and supply govern the economy. As such, an imbalance in any aspect of it can trigger an inflation. Demand-pull inflation occurs when the general level of demand for goods and services are higher than the general level of supply.

Think of this as too much money after too few goods. When more people want goods and services that are limited, prices go up and keep going up as long as the level of supply is not enough.

Cost-push Inflation

This is the opposite of demand-pull inflation. Cost-push inflation refers to a situation where there is a decrease in the total available supply of goods and services. This reduction in supply is typically caused by an increase in the cost of production.

For example, where there is an increase in the cost of the raw materials used to make something like toothpaste, those who produce toothpaste might not be able to produce as much as they ordinarily could. This ultimately increases the unit price of such goods.

This primarily occurs with important goods and services without substitutes or alternatives.

Stagflation

In the case of stagflation, the government of a country basically have their hands tied up. On one hand, the economy is slow with poor demand for goods and services as well as high unemployment rates. On the other hand, prices are high. It is ironic because prices generally are high because of high demand.

However, cost-push inflation could trigger stagflation. The risk is that if policy makers try to reduce inflation, they might further aggravate the unemployment issue. The general way to curb stagflation is to increase the value of money and one way to do this is to increase interest rates.

Asset Inflation

Asset inflation is a form of inflation where there is a general rise in the price of specific assets as opposed to goods and services. Also known as an asset bubble, this occurs with only one asset class, say real estate, gold, bonds or the stock market.

Core Inflation

As the name implies, core inflation refers to the general rise in goods and services on core items. Here, there is a long rising trend in the general price level and it is calculated with the exclusion of goods and services that are generally volatile like food and energy.

Just energy alone is enough to increase the cost of transportation and even feeding. These excluded costs are regarded as transitory or items with temporary price volatility.

This form of inflation is useful when the government is setting monetary policies as they really would not want to adjust interest rates every time the price of energy increases.

Wage Inflation

Also known as wage push inflation, wage inflation refers to the general increase in the amount people earn over a period of time, faster than the overall cost of living. When wages go up, companies or employers have to increase the prices they charge for the goods and services they provide. This could ultimately lead to cost-push inflation.

Written by Lawretta Egba.