Guide to Understanding Inflation

The media uses many different terms for inflation. Typical terms are core, headline, asset, stagflation, deflation, hyperinflation, and shrinkflation. What's the difference? This article will briefly overview inflation and some of the different terms to describe it.

People usually use the term "inflation" to mean goods and services are more expensive. Economists use the term inflation to refer to a loss of purchasing power. Some would say inflation is a price increase without an increase in value.

Three main mechanisms cause inflation: cost-push, demand-pull, and built-in inflation.

The two primary drivers of cost-push inflation would be higher wages and higher raw material costs . Cost-push inflation is not driven by increased demand. Cost-push inflation is related to higher production costs.

Demand-pull inflation is the most common form of inflation. Demand-pull inflation is an increase in demand straining the supply chain. Economists say, "too many dollars are chasing too few goods." There are multiple reasons for demand-pull inflation, but the primary drivers are government spending, expansion of the money supply, and a fast-growing economy.

Built-in inflation is an expectation that inflation will continue at a steady pace. Built-in inflation is a circle of self-fulling prophecies, either cost-push or demand-pull inflation. If people expect inflation to be 5%, workers will want a 5% pay increase. When wages increase 5%, there is a 5% increase in labor cost, which would become cost-push inflation. Suppose the wage increase exceeds the actual inflation. In that case, people will have extra dollars to spend, which becomes demand-pull inflation.

Headline inflation is how most people understand inflation. Headline inflation is the Consumer Price Index (CPI), a basket of consumer goods and services. CPI is a snapshot of how much different commodities cost, like food, consumer goods, energy, housing, and healthcare. Headline inflation is the total inflation in society.

What is Core inflation? Core inflation is how policymakers make decisions. Core inflation is also based on a basket of goods but removes the most volatile commodities like food and energy. Policymakers don’t want to change interest rates every time the price of oil changes or stock market food commodities like orange juice change price.

Asset inflation is higher prices within an asset class. Most people refer to this type of inflation as a “bubble.” The best example of asset inflation was the housing "bubble," which led to the great recession of 2008.

Deflation is the reduction of prices for goods and services. Deflation is the opposite of inflation, and purchasing power increases. The price decreases can be good for the consumer in the short term but bad for the market long term. Some think deflation is the logical counterbalance to asset inflation, i.e., the asset bubble "pops." Deflation is a polite and political way of saying market crash.

What is Disinflation? Disinflation is the slowing down of the inflation rate.

Hyperinflation is a monthly increase of inflation by 50% or more. Usually, hyperinflation leads to abandoning the currency like Zimbabwe, Weimar, Germany, and the Confederacy during the American Civil War.

Shrinkflation is hidden inflation. Producers will put fewer products into the package but charge the same price. For example, a hypothetical bottle of orange juice used to have 64 ounces and sold for $3.99. The manufacturer changed the packaging size and now has 58 ounces of orange juice and sells for $3.99. There was a 12.5% price hike, but not easily seen on the sticker price. Shrinkflation is a marketing gimmick to add a step before the consumer realizes they are paying more.

Stagflation is the inflation trifecta. Stagflation is high inflation, high unemployment, and slow economic growth simultaneously. The best example of stagflation is the oil crisis of the 1970s. There is much debate about what exactly caused the stagflation of the 1970s. Still, one of the most prominent theories is that ending the gold standard was the primary catalyst.

Talking heads describe inflation in different ways, and the distinctions are important. However, in the simplest terms, inflation is a wealth stealer. Most people would not like their houses robbed. Instead, they would take deliberate actions like locking the doors and installing cameras and security systems to protect themselves from theft. If locking the door for the items money can buy is a good idea, it also makes sense to take deliberate actions to protect your money from theft. Gold and other precious metals are like locks on doors and windows protecting from inflation and its gang of wealth stealers.

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