Types of Inflation Rate
There are four main categories of inflation rate, organized by their underlying economic drivers: Demand-Pull Inflation, Cost-Push Inflation, Built-In Inflation, and Hyperinflation.
Main Categories
- Demand-Pull Inflation — occurs when aggregate demand exceeds the available supply of goods and services, driving up prices, as seen in the United States in the late 1990s when low unemployment and strong economic growth led to increased consumer spending and subsequent price increases.
- 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 Volkswagen when steel prices rose significantly in 2004, forcing the company to increase the prices of its vehicles.
- Built-In Inflation — results from past inflation, as workers and businesses adjust their expectations and behaviors to anticipate future inflation, such as the Wage-Price Spiral, where higher expected inflation leads to higher wages, which in turn drive up prices, as observed in the 1970s in the United Kingdom.
- Hyperinflation — characterized by extremely high and accelerating inflation rates, often caused by excessive money printing and a subsequent loss of confidence in the currency, as seen in Zimbabwe in the 2000s, where the inflation rate peaked at 89.7 sextillion percent in mid-November 2008.
Comparison Table
| Category | Cause | Effect on Prices | Example |
|---|---|---|---|
| Demand-Pull Inflation | Aggregate demand exceeds supply | Prices rise due to strong demand | US economic boom in the late 1990s |
| Cost-Push Inflation | Increases in production costs | Prices rise due to higher costs | Volkswagen's price increase in 2004 |
| Built-In Inflation | Past inflation and expectations | Prices rise due to anticipated inflation | UK's wage-price spiral in the 1970s |
| Hyperinflation | Excessive money printing and loss of confidence | Extremely high and accelerating price increases | Zimbabwe's inflation crisis in the 2000s |
How They Relate
The categories of inflation rate are interconnected and can feed into each other, with Demand-Pull Inflation and Cost-Push Inflation often contributing to Built-In Inflation, as expectations of future inflation become embedded in the economy. Hyperinflation is a more extreme case, often resulting from a combination of Demand-Pull Inflation and Cost-Push Inflation, along with a loss of confidence in the currency. Specific pairs, such as Demand-Pull Inflation and Cost-Push Inflation, can be commonly confused, as both involve rising prices, but they have distinct underlying causes, with Demand-Pull Inflation driven by strong demand and Cost-Push Inflation driven by increasing production costs. Similarly, Built-In Inflation and Hyperinflation can be distinguished by their severity and the degree to which expectations and confidence in the currency are affected.