Categories of Inflation in Economics

Inflation is defined as the rate of increasing prices over time, which results in less consumer spending power. Simply put, this means the value of a dollar decreases and you don’t get as much from your money as you used to.

There are many different causes of inflation, types, and outcomes. Understanding the differences is important because it helps you make smarter financial decisions and manage inflation effectively. Here we’ll break down eight specific types of inflation, explain their causes and effects, and provide examples for each.

Negative Inflation

Also known as deflation, this is when the price of goods and services gradually drops over time. Negative inflation is the opposite of inflation; things become more affordable. This can happen when consumers spend less or investment declines, which pushes prices down. Or, if productivity increases and products can be made for less, this too can lead to negative inflation.

A recent example was in 2021, shortly after the peak of the COVID pandemic, when airfare costs dramatically plunged because many people were afraid to fly.

Negative inflation is distinct from other types of inflation because it’s the only one that increases spending power. While that may sound beneficial at first glance, negative inflation can be problematic if companies lay off large numbers of employees because of lost profits. In some cases, it can also lead to widespread unemployment, which can set off a domino effect that can be difficult to break.

Hyperinflation

Hyperinflation is inflation at its most extreme. While inflation is normal and typically hovers around 3% each year, hyperinflation is when prices increase rapidly to the point that they become out of control.

To quantify, inflation becomes hyperinflation when rates exceed 50% each month over time. Common causes of this phenomenon are serious economic instability that leads to widespread product shortages and price spikes (think war or COVID) and when central banks print excessive money because of an economic recession or depression. An example would be in the 1920s at the end of World War I when Germany printed excessive money to make war reparations, which led to prices increasing by 700%.

Hyperinflation is unique from other types of inflation because of its extreme nature. In terms of effects, it can potentially cripple an economy, making its currency nearly worthless and leading to poverty, hunger, and social unrest.

Creeping Inflation

Compared to hyperinflation, creeping inflation is on the opposite end of the spectrum. This is a much slower, less extreme form of inflation, which is less than the average rate. With creeping inflation, consumer prices rise slowly and steadily, and it’s much less disruptive to the economy.

If, for example, a country only had an inflation rate of 1 or 2% over the course of a year, that would be considered creeping inflation.

In terms of causes, it’s usually due to consumers spending more on products or services, which, in turn, creates a slightly higher demand and increased prices. The main differentiator of creeping inflation is that many economists see it as largely beneficial, as it can spark economic growth. That said, if it’s allowed to increase and spiral out of control, it can become harmful in the long run.

Galloping Inflation

Galloping inflation is when prices increase more than creeping inflation but not as much as hyperinflation. For instance, if a country experiences an inflation rate of around 20%, this would be considered galloping inflation because it’s far more than creeping inflation but not as high as hyperinflation at more than 50%.

Common causes can include sudden increases in essential consumer products, such as oil, or significant bumps in employee wages, which result in higher prices.

Galloping inflation can be quite harmful to an economy because it greatly reduces purchasing power and can create economic instability. But it isn’t as severe as hyperinflation, which can completely bring an economy to its knees.

Inertial Inflation

This is a continuous, self-sustaining type of inflation that keeps happening even if there are no palpable issues impacting it. Say, for instance, there are no dramatic spikes in supply or demand, but gradual inflation still happens anyway. That would be an example of inertial inflation, where the “inertia” perpetuates the phenomenon.

Some typical causes are price indexation, where prices are automatically adjusted with the passage of time, which leads to higher prices, and wage indexation where wages are increased to keep up with higher prices. In terms of effects, inertial inflation can discourage investments, which can slow economic growth. Additionally, it can make a country less appealing to do business with, which can result in it lagging behind competitors.

Inertial inflation is distinct from others because it’s so “stubborn,” where ingrained cycles are difficult to break. Once a pattern becomes established, it’s hard to reverse.

Cost-Push Inflation

Also known as wage-push inflation, this type of inflation stems specifically from increases in production costs. Often, this is the result of higher wages, which increase the cost of production (hence the name “wage-push inflation”). However, it can also be due to other factors, such as increased cost of raw materials, supply chain disruptions, and increased taxes for companies.

Say, for example, a tech company was forced to dramatically increase employee wages to remain competitive in its industry. This could lead to cost-push inflation, which increases its production costs.

This form of inflation can be burdensome to both businesses and consumers because it increases prices for both.

Demand-Pull Inflation

Demand-pull inflation is when the demand for goods and services is more than what’s available. In other words, when there’s more demand than supply, it creates an imbalance, which leads to demand-pull inflation.

A good example would be during the holiday season when there’s often excessive demand for certain items and people are willing to overspend on them. When this happens, it can quickly drive up prices.

Although demand-pull inflation can have potential benefits like economic growth, it can also create issues like dramatic price increases on certain items, and in some cases, economic instability.

Built-In Inflation

Built-in inflation results when employees demand higher wages to account for the rising cost of living. Subsequently, this forces businesses to increase their labor costs, which drives up the cost of living even more. As a result, workers demand even higher wages, which creates a vicious cycle.

If, for instance, there’s a large spike in transportation, housing, and food costs, it could force workers to demand larger wages, which sets off a chain reaction. Built-in inflation overlaps with cost-push inflation somewhat because it’s due to higher wages, which raises the cost of production. However, it’s unique because it’s so persistent and self-perpetuating.

Once built-in inflation takes off, it’s extremely difficult to break the cycle. It often leads to ongoing inflation and can be disruptive to the overall economy.