Types of Inflation

Written by: Connor Bruwer 

I’m sure we’ve all noticed the presence of inflation. It’s all over the news. It’s hard to say that not all of us have been affected, even in the tiniest form. I know for many of us, refilling our tanks has been a hassle, with the drastic increase in the price of gas. 

Types of inflation

Inflation occurs when there’s increased pressure on demand. Value of money decreases, while the value of goods and services increases. Sometimes, inflation is classified in three ways: Demand-Pull inflation, Cost-Push inflation and Built-In inflation 

Often considered as the most common form of inflation, demand-pull inflation occurs when aggregate demand overpowers aggregate supply. Because consumers are willing and able to purchase a certain good with higher demand, the price of that good increases. This then takes away the purchasing power of consumers. Oftentimes, demand-pull inflation is a sign of great economic performances, with rising employment rates. However, when consumer spending rises, it becomes difficult for firms to maintain quality performance as the demand of their product rises. Wage inflation also exists within demand-pull. As firms produce more of their product, they face an increase in demand for workers, which puts a pressure on increased wages. 

On the other hand, cost-push inflation is mainly driven by producers, which affects consumers. This type of inflation can be either expected, or unexpected. An increase in wages and cost of production, including the price of materials and resources are primary expected causes. Unexpected causes include, natural disasters, which may damage a production facility and impact the performance of production, causing a rise in production costs. At the end of the day, consumers have to pay the price of higher costs for the company’s product/service.

Finally, built-in inflation seems like the type of inflation that only gets worse. This occurs when individuals demand for higher wages in order to maintain their cost of living. This is known as a “wage-price spiral”. However, this only makes matters worse, with company’s / businesses raising the prices of their products / services. This causes a loop that forces workers to continuously demand for higher wages. 

The chart above shows the increase in annual inflation rates. As all three types of inflation play a role in the rise, the U.S. has experienced it’s highest rate of inflation throughout the past 40 years. 

As we dive deeper into the presence of inflation, it’s important to consider the different types that play a significant role in the rise of prices. It’s hard to not acknowledge the effects of inflation, as we all may be experiencing. It’s interesting to see the many, and complex routes taken in order to reduce the presence of inflation. 

Works Cited

Belda, Annemarie. “Inflation Defined (What Is the Inflation Rate?) | Mint.” Mint, 24 August 2020, https://mint.intuit.com/blog/planning/inflation/. Accessed 2 May 2022.

“Current US Inflation Rates: 2000-2022 | US Inflation Calculator.” Inflation Calculator, https://www.usinflationcalculator.com/inflation/current-inflation-rates/. Accessed 2 May 2022.

“Inflation 40 year high: CPI March 2022 hits 8.5% annually.” USA Today, 12 April 2022, https://www.usatoday.com/story/money/2022/04/12/inflation-rate-cpi-highest-40-years-prices/7284054001/. Accessed 2 May 2022.

“Inflation Definition - Economy.” Investopedia, https://www.investopedia.com/terms/i/inflation.asp. Accessed 2 May 2022.

Kelly, Robert. “Cost-Push Inflation Definition.” Investopedia, https://www.investopedia.com/terms/c/costpushinflation.asp. Accessed 2 May 2022.

Kelly, Robert. “Demand-Pull Inflation Definition - Economics.” Investopedia, https://www.investopedia.com/terms/d/demandpullinflation.asp. Accessed 2 May 2022.

“Current US Inflation Rates: 2000-2022 | US Inflation Calculator.” Inflation Calculator, https://www.usinflationcalculator.com/inflation/current-inflation-rates/. Accessed 2 May 2022.