Creeping or mild inflation is when prices rise 3 percent a year or less. According to the Federal Reserve, when prices increase 2 percent or less it benefits economic growth. This kind of mild inflation makes consumers expect that prices will keep going up. That boosts demand. Consumers buy now to beat higher future prices. That's how mild inflation drives economic expansion. For that reason, the Fed sets 2 percent as its target inflation rate.
This type of strong, or pernicious, inflation is between 3-10 percent a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow's much higher prices. This drives demand even further, so that suppliers can't keep up. More important, neither can wages. As a result, common goods and services are priced out of the reach of most people.
When inflation rises to 10 percent or more, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. Galloping inflation must be prevented at all costs.
Hyperinflation is when prices skyrocket more than 50 percent a month. It is very rare. In fact, most examples of hyperinflation have occurred only when governments printed money to pay for wars. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and Venezuela in the 2010s. The last time America experienced hyperinflation was during its civil war.
Stagflation is when economic growth is stagnant but there still is price inflation. This seems contradictory, if not impossible. Why would prices go up when there isn't enough demand to stoke economic growth?
It happened in the 1970s when the United States abandoned the gold standard. Once the dollar's value was no longer tied to gold, it plummeted. At the same time, the price of gold skyrocketed.
Stagflation didn't end until Federal Reserve Chairman Paul Volcker raised the fed funds rate to the double-digits. He kept it there long enough to dispel expectations of further inflation. Because it was such an unusual situation, stagflation probably won't happen again.
The core inflation rate measures rising prices in everything except food and energy. That's because gas prices tend to escalate every summer. Families use more gas to go on vacation. Higher gas costs increase the price of food and anything else that has large transportation costs.
Deflation is the opposite of inflation. It's when prices fall. It's caused when an asset bubble bursts.
That's what happened in housing in 2006. Deflation in housing prices trapped those who bought their homes in 2005. In fact, the Fed was worried about overall deflation during the recession. That's because deflation can turn a recession into a depression. During the Great Depression of 1929, prices dropped 10 percent a year. Once deflation starts, it is harder to stop than inflation.
Wage inflation is when workers' pay rises faster than the cost of living. This occurs in three situations. First, is when there is a shortage of workers. Second, is when labor unions negotiate ever-higher wages. Third is when workers effectively control their own pay.
A worker shortage occurs whenever unemployment is below 4 percent. Labor unions negotiated higher pay for auto workers in the 1990s. CEOs effectively control their own pay by sitting on many corporate boards, especially their own. All of these situations created wage inflation.
Of course, everyone thinks their wage increases are justified. But higher wages are one element of cost-push inflation. That can drive up prices of a company's goods and services.
An asset bubble, or asset inflation, occurs in one asset class. Good examples are housing, oil and gold. It is often overlooked by the Federal Reserve and other inflation-watchers when the overall rate of inflation is low. But the subprime mortgage crisis and subsequent global financial crisis demonstrated how damaging unchecked asset inflation can be.
Gas prices rise each spring in anticipation of the summertime vacation driving season. In fact, you can expect gas prices to rise ten cents per gallon each spring. But political uncertainty in the oil-exporting countries drove gas prices higher in 2011 and 2012. Prices hit an all-time peak of $4.17 in July 2008, thanks to economic uncertainty.
Crude oil prices hit an all-time high of $143.68 a barrel in July 2008. This was in spite of a decrease in global demand and an increase in supply. Oil prices are determined by commodities traders. That includes both speculators and corporate traders hedging their risks. Traders bid up oil prices in two situations. First, is if they think there are threats to supply, such as unrest in the Middle East. Second, is if they see an uptick in demand, such as growth in China.
An asset bubble occurred when gold prices hit the all-time high of $1,895 an ounce on September 5, 2011. Although many investors might not call this inflation, it sure was. That's because prices rose without a corresponding shift in gold's supply or demand. Instead, investors ran to gold as a safe haven. They were concerned about the declining dollar. They felt gold protected them from hyperinflation in U.S. goods and services. They were uncertain about global stability.
What spooked investors? In August, the jobs report showed absolutely zero new job gains. During the summer, the eurozone debt crisis looked like it might not get resolved. There was also stress about whether the United States would default on its debt. Gold prices rise in response to uncertainty. Sometimes it's to hedge against inflation. Other times it's the exact opposite, the resurgence of recession.
Types of Inflation: The Four Most Critical Plus Nine More
Including Asset, Wage, and Core Inflation
Inflation is when the prices of goods and services increase. There are four main types of inflation, categorized by their speed. They are creeping, walking, galloping and hyperinflation. There are specific types of asset inflation and also wage inflation. Some experts say demand-pull and cost-push inflation are two more types, but they are causes of inflation. So is expansion of the money supply.