CandleFocus Glossary Editor
Inflation is an economic phenomenon that affects a number of aspects of our lives, and it is important to understand what it is and how it works. Inflation is essentially an increase in the prices of goods and services over a period of time. It is measured by the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Inflation is a result of changes in the money supply, and it is sometimes written as an increase in the general level of prices.
There are three main types of inflation: demand-pull, cost-push and built-in inflation.
Demand-Pull Inflation is when there is a large increase in demand for a good or service. This larger demand forces up the prices for the good or service as the suppliers can’t keep up with the demand and therefore want to charge higher prices to make a greater profit. Demand-pull inflation has generally been responsible for most periods of rapid inflation in economies.
Cost-Push Inflation is when there is a sharp increase in the costs of supplies to produce items, and this cost-push has to be passed onto the consumer in the form of higher prices. Cost-push inflation can occur due to rises in the cost of raw materials, wages, or transport rates. This type of inflation is usually not as long-term or significant as demand-pull inflation.
Built-in Inflation is a combination of the two above types, with the impact of each playing an important role in the success or failure of an economy. Built-in inflation occurs when there is a sustained increase in costs caused by a large increase in demand for goods or services, thereby pushing up prices. This type of inflation is more persistent and is often seen in economies where demand for goods is high and growth is stagnating.
Inflation can have both positive and negative effects, depending on the level and rate of change. For those with investments in tangible assets such as property or stocks, inflation could lead to a rise in the value of their asset, as the purchasing power of the currency itself is devalued. On the other hand, it could also lead to people suffering a reduced purchasing power and an inability to save, due to the rise in prices.
Inflation is an important economic indicator, and it can give us a useful insight into the health of a country’s economy. It is therefore important to be aware of all the different types of inflation and how they can affect our daily lives and the economy overall.
There are three main types of inflation: demand-pull, cost-push and built-in inflation.
Demand-Pull Inflation is when there is a large increase in demand for a good or service. This larger demand forces up the prices for the good or service as the suppliers can’t keep up with the demand and therefore want to charge higher prices to make a greater profit. Demand-pull inflation has generally been responsible for most periods of rapid inflation in economies.
Cost-Push Inflation is when there is a sharp increase in the costs of supplies to produce items, and this cost-push has to be passed onto the consumer in the form of higher prices. Cost-push inflation can occur due to rises in the cost of raw materials, wages, or transport rates. This type of inflation is usually not as long-term or significant as demand-pull inflation.
Built-in Inflation is a combination of the two above types, with the impact of each playing an important role in the success or failure of an economy. Built-in inflation occurs when there is a sustained increase in costs caused by a large increase in demand for goods or services, thereby pushing up prices. This type of inflation is more persistent and is often seen in economies where demand for goods is high and growth is stagnating.
Inflation can have both positive and negative effects, depending on the level and rate of change. For those with investments in tangible assets such as property or stocks, inflation could lead to a rise in the value of their asset, as the purchasing power of the currency itself is devalued. On the other hand, it could also lead to people suffering a reduced purchasing power and an inability to save, due to the rise in prices.
Inflation is an important economic indicator, and it can give us a useful insight into the health of a country’s economy. It is therefore important to be aware of all the different types of inflation and how they can affect our daily lives and the economy overall.