Types of Inflation: The 4 Most Critical Plus 9 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: creeping, walking, galloping, and hyperinflation. There are also many types of asset inflation and, of course, wage inflation. Many experts consider demand-pull and cost-push to be types of inflation, but they are actually causes of inflation, as is expansion of the money supply.

1
Creeping Inflation

People know that next year's car model will probably cost more. (Photo: Bill Pugliano/Getty Images)

Creeping or mild inflation is when prices rise 3% a year or less. According to the U.S. Federal Reserve, when prices rise 2% or less, it's actually beneficial to economic growth. That's because this mild inflation sets expectations that prices will continue to rise. As a result, it sparks increased demand as consumers decide to buy now before prices rise in the future. By increasing demand, mild inflation drives economic expansion.

2
Walking Inflation

Health care costs rise faster than 3% a year. (Photo: Jason Greenspan/Getty Images)

This type of strong, or pernicious, inflation is between 3-10% 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.

3
Galloping Inflation

Galloping inflation occurred during WWII. (Photo: U.S. National Archives and Records Administration)

When inflation rises to ten percent or greater, 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.

4
Hyperinflation

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At time of hyperinflation in Germany, 20's : banknotes in a bank in Berlin. Credit: APIC/Getty Images

Hyperinflation is when the prices skyrocket more than 50% a month. It is fortunately very rare. In fact, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War. More

5
Stagflation

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Federal Reserve Chairman Paul Volcker ended stagflation (Photo: Win McNamee/Getty Images)
Stagflation is just like its name says: 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 U.S. went off the gold standard. Once the dollar's value was no longer tied to gold, the number of dollars in circulation skyrocketed. This increase in the money supply was one of the causes of inflation. Stagflation didn't end until then-Federal Reserve Chairman Paul Volcker raised the Fed funds rate to the double-digits -- and kept it there long enough to dispel expectations of further inflation. Because it was such an unusual situation, it probably won't happen again. More

6
Core Inflation

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Food prices are not included in the core inflation rate. Photo: Monashee Frantz/Getty Images

The core inflation rate measures rising prices in everything except food and energy. That's because gas prices tend to escalate every summer, usually driving up the price of food and often anything else that has large transportation costs. The Federal Reserve uses the core inflation rate to guide it in setting monetary policy. The Fed doesn't want to adjust interest rates every time gas prices go up -- and you wouldn't want it to. More

7
Deflation

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Deflation seems good at first, but it has terrible consequences for businesses and homeowners. Photo by Mario Tama/Getty Images

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% -- a year. Once deflation starts, it is harder to stop than inflation. More

8
Wage Inflation

Most U.S. workers have not experienced wage inflation. (Photo: Getty Images)

Wage inflation is when workers' pay rises faster than the cost of living. This occurs when there is a shortage of workers, when labor unions negotiate ever-higher wages, or when workers effectively control their own pay. A worker shortage occurs whenever unemployment is below 4%. Labor unions negotiated higher pay for auto workers in the 90s. 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. However, higher wages are one element of cost-push inflation, and can cause prices of the company's goods and services to rise.

9
Asset Inflation

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In 2005, there was an asset bubble in housing. (Photo: Justin Sullivan/Getty Images)

An asset bubble, or asset inflation, occurs in one asset class, such as housing, oil or gold. It is often overlooked by the Federal Reserve and other inflation-watchers when the overall rate of inflation is low. However, as we saw in the subprime mortgage crisis and subsequent global financial crisis, asset inflation can be very damaging if left unchecked. More

10
Asset Inflation -- Gas

Gas price inflation
Inflation in gas prices affect people dramatically. (Photo: Mark Renders/Getty Images)

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. However, 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. For more on that, see Gas Prices in 2008.

 

What do oil prices have to do with gas prices? A lot. In fact, oil prices are responsible for 72% of gas prices. The rest is distribution and taxes, which aren't as volatile as oil prices. For more, see How Do Crude Oil Prices Affect Gas Prices? More

11
Asset Inflation -- Oil

oil price inflation
Oil price inflation affects many other asset classes. (Photo: David McNew/Getty Images).

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 will bid up oil prices if they think there are threats to supply, such as unrest in the Middle East, or an uptick in demand, such as growth in China. More

12
Asset Inflation -- Food

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Food price inflation can cause food riots. (Photo: Elly Lange/ Getty Images).

Food prices soared 6.8% in 2008, causing food riots in India and other emerging markets. They spiked again in 2011, rising 4.8%. High food costs led to the Arab Spring, according to many economists. Food riots caused by inflation in this important asset class could reoccur. More

13
Asset Inflation -- Gold

Gold price inflation
Inflation in gold prices occurred in 2011.(Photo: David McNew/Getty Images)

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 drove up gold prices as a safe haven. They were concerned about the declining dollar, hyperinflation in U.S. goods and services, and uncertainty about global stability. What spooked investors? In August, the jobs report showed absolutely zero new jobs gains. During the summer, the eurozone debt crisis looked like it might not get resolved and there was stress about whether the U.S. would default on its debt. Gold prices go up in response to uncertainty, whether it's to hedge against inflation or its exact opposite, the resurgence of recession More