Explaining the Types of Inflation

Explaining the Types of Inflation

Inflation can be classified by its speed, cause, or measures

By Matthew R Webber  Updated on October 13, 2022

Reviewed by Robert C. Kelly  Fact checked by Taylor Tompkins

Inflation happens when prices rise across the economy. Goods and services such as food, gas, rent, and clothing are usually where people feel inflation the most.

But prices can change for different reasons, in different ways, and at different speeds. Prices may change because a good or service is in higher demand or there have been significant impacts to supply. Larger shocks to the economy such as stock market crashes, pandemics, or war can also impact pricing.

Each instance of inflation is different. However, the general principle can be understood by looking at three key characteristics of inflationary forces: the pace, the cause, and how it is measured.

Key Takeaways

Inflation describes a situation in which prices across an economy are rising, where the cost of goods, services, and raw materials are increasing.

Inflation can vary in pace, from creeping inflation of 1% per year to the kind of hyperinflation seen in Germany in the 1930s.

Inflation has various causes and can occur in a number of different ways.

Inflation can also be measured in different ways: by looking at the standard prices that consumers pay, or by considering the price of individual commodities.

Inflation by Pace

The speed of inflation can vary a lot. In some cases, prices increase by a manageable 2% a year, encouraging individuals to invest their money to maintain its value. In other cases, inflation can happen catastrophically fast, or even go into reverse.

Creeping Inflation

Creeping, or mild, inflation occurs when prices rise slowly. According to the Federal Reserve, when prices increase by 2% or less, it benefits economic growth. This kind of mild inflation makes consumers expect that prices will keep going up, which boosts demand. Consumers buy now in order to beat higher future prices, and so mild inflation drives economic expansion. For that reason, the Fed sets 2% as its target inflation rate.

Walking Inflation

This type of inflation is faster than creeping inflation, but not as fast as galloping or hyperinflation. It is harmful to the economy because it heats up economic growth too quickly. People start to buy more than they need in order to avoid tomorrow's much higher prices. This increased buying drives demand even further, and suppliers often can't keep up. More importantly, neither can most people’s wages. As a result, you can be priced out of common goods and services.

Galloping Inflation

When inflation rises to 10% or more, it can be very damaging to the economy.1 Money loses value so quickly that business and employee income can't keep up with costs and prices. Foreign investors, in turn, avoid the country where this occurs, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. For this reason, avoiding galloping inflation is a key objective of many central banks.

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