As we covered in 'Inflation Explained', inflation can be defined as an increase in the price of a defined group of goods and services and the subsequent reduction in the true value of money.
There are different types of inflation that you will encounter, some referring to how the information is gathered to measure inflation and categories of how inflation is influenced.
Inflation Sampling Types
As with the majority of economic benchmarks, inflation is based on economic samples. These include a myriad of factors which benchmark the flow of money and value of goods. As with any mathematic sample, there can be variation and fluctuation in the sample figures. These fluctuations can distort the benchmark figure upon which key economic forecast are made. In order to rationalise the inflation figure, economists analyse inflation metrics and clean our those which are likely to cause anomalies on inflation figures. The refined output is known as 'Core inflation'. Core inflation is a more reliable benchmark for economic forecasts but, it remains a sample and indication only. No forecasts are ever 100% accurate.
In simple terms, 'Inflation' tends to mean a broader sample where as 'Core Inflation' suggests that some thought and work have been invested to produce a more robust inflation figure.
Inflation Influencing Types
Understanding the inflation sampling approach is useful but what are the different "types" of inflation? The types of inflation are typically named by the events that influence inflation, these can be categorised as
- Pull inflation: When Aggregate Demand grows faster than Aggregate Supply. Pull inflation is the most common inflation type you will encounter in modern economics. The combination of increasing population, expedited production times and market driven underproduction (artificial inflation) are but a number of factors which drive pull inflation.
- Growth-pull (Demand-pull): When economic growth outstrips the ability to support manageable growth (insufficient supply chain, infrastructure, materials or skills)
- Wage-pull: When a shortage of a specific skillset or emerging market forces companies to pay higher salaries to secure the appropriate workforce. This in turn may lead to wage -push inflation on product/service costs.
- Push inflation: Push inflation occurs when the factors affecting the holistic cost of the product/service result in the increased resell value of the goods/skills.
- Cost-push: When there is an increase in the cost of materials/production which directly affects the cost of production. Examples include increasing cost of metals or additional safety measures / production standards
- Wage-push: Salary costs are typically always rising so create additional cost in all markets Year-on-Year (YoY) but Wage-push typically refers to accelerated salary costs, perhaps due to an increased requirement for a specific skill or due to litigation on training requirements.
- Currency inflation: Fluctuations in global exchange rates have had more impact in the past 30 years as consumers increasing buy directly from external countries. As the 'exchange rate' value of those goods fluctuates, so does the spending habits of consumers. Currency inflation is known as imported inflation and is caused when the exchange rate is such that imported goods become more expensive to the native consumer. Currency exchange inflation can affect both push and pull inflation as markets adapt to meet the changing economic situation, in the long term changing where goods are manufactured and workforce employed. Good example being the high use of call centres in Poland, India and Pakistan where staff costs were significantly cheaper due to exchange rates and wage push inflation in the UK.
- Tax inflation: increasing taxes reduces the flow of money and buying power of businesses and consumers. This in turn leads to a reduced demand and can cause deflation. Reducing taxes increases the flow of money in local and the wider economy and businesses invest and people spend more which in turn can lead to demand inflation.
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