Types of Inflation
There are four main categories of inflation, organized by their underlying causes: Demand-Pull Inflation, Cost-Push Inflation, Built-In Inflation, and Monetary Inflation.
Main Categories
- Demand-Pull Inflation — occurs when aggregate demand exceeds the available supply of goods and services, causing businesses to raise their prices, as seen in the US economy during the late 1990s when low unemployment and high consumer spending led to increased demand for goods and services, with companies like Apple raising prices for their products.
- Cost-Push Inflation — arises from increases in production costs, such as higher wages or raw materials costs, which are then passed on to consumers through higher prices, as experienced by Starbucks when the company raised its coffee prices in response to increased coffee bean costs.
- Built-In Inflation — also known as the wage-price spiral, occurs when workers demand higher wages to keep up with expected price increases, leading to a self-reinforcing cycle of price and wage increases, as observed in the 1970s in the US when unionized workers negotiated for higher wages to offset expected price increases, with companies like Ford responding by raising prices.
- Monetary Inflation — results from an increase in the money supply, often caused by central bank actions, which leads to more money chasing a constant quantity of goods and services, thereby driving up prices, as seen in Zimbabwe in the 2000s when the country's central bank printed large amounts of money, leading to hyperinflation, with companies like Delta Corporation raising prices daily.
Comparison Table
| Category | Cause | Effect on Prices | Example |
|---|---|---|---|
| Demand-Pull Inflation | Aggregate demand exceeds supply | Prices rise due to high demand | Apple raises iPhone prices |
| Cost-Push Inflation | Increases in production costs | Prices rise due to higher costs | Starbucks raises coffee prices |
| Built-In Inflation | Wage-price spiral | Prices and wages rise together | Ford raises prices and wages |
| Monetary Inflation | Increase in money supply | Prices rise due to excess money | Delta Corporation raises prices daily |
How They Relate
The categories of inflation are interconnected and can feed into each other, with Demand-Pull Inflation often leading to Cost-Push Inflation as businesses face higher production costs due to increased demand. Built-In Inflation can also contribute to Demand-Pull Inflation if workers' expectations of price increases lead to higher demand for goods and services. Monetary Inflation can exacerbate Cost-Push Inflation by fueling higher production costs through increased money supply, as seen in the case of Venezuela where monetary inflation led to high production costs and subsequent price increases. Specific pairs, such as Demand-Pull Inflation and Cost-Push Inflation, are commonly confused, but can be distinguished by their underlying causes, with Demand-Pull Inflation driven by aggregate demand and Cost-Push Inflation driven by production costs. Similarly, Built-In Inflation and Monetary Inflation can be differentiated by their focus on wage-price spirals and money supply, respectively.