Three Types of Inflation

As prices hit a 40-year high, inflation dominates the news.

The prices of daily necessities, including food and energy, are the most widely referenced type of inflation, but there are other forms of inflation in a broader economic system.

In 'New York Life One-Minute Market Introduction', we present three types of inflation and the macroeconomic factors that influence each type.

1. Monetary Inflation

When the supply of money in the usa increases over time, monetary inflation occurs. This represents the physical and digital currency circulating in the economy, including cash, checking accounts, and money market mutual funds.

The usa central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply to stimulate the economy, suppress inflation, and maintain price stability.

To address the COVID-19 crisis, during the period from 2020 to 2021, the money supply increased by approximately 25%, setting a historical record.
Since then, as the economy has shown signs of strength, the Federal Reserve began to reduce the scale of its bond purchases.

It is worth noting that theoretically, a faster growth rate of the money supply than the growth rate of actual output may lead to consumer price increases, especially when the velocity of money circulation (monetary turnover speed) is high. This is because there is more money chasing the same amount of goods, ultimately leading to price increases.

2. Consumer price inflation

When the prices of goods and services rise, consumer price inflation occurs. It is typically measured by the Consumer Price Index (CPI), which shows the average price increase of a basket of goods, such as food, clothing, and housing.

Supply chain issues, geopolitical events, money supply, and consumer demand can all impact consumer price inflation.

In May, the CPI rose by 8.6% year-on-year, reaching the highest level in 40 years. The Russia-Ukraine conflict and
COVID-19 led to widespread disruptions in the supply chains from oil to wheat, increasing global price pressures.

When consumer price inflation is overheating, central banks may raise interest rates to reduce spending and cool prices.

3. Asset price inflation

Asset price inflation represents the growth of prices of stocks, bonds, real estate, and other financial assets over time. While there are various methods to show asset price inflation, we will use the percentage of household net assets to GDP to indicate it.

Low interest rate environments typically create a favorable environment for asset prices. This can be seen over the past decade as low borrowing costs complement continuously rising asset prices and strong investor confidence.
In 2021, household net assets accounted for 620% of GDP.

How different types of inflation can affect you

With monetary inflation, both businesses and consumers have more disposable income, which may stimulate demand and further increase overall economic inflation.

However, the extent of the impact on consumer price inflation remains uncertain. Over the past decade, the money supply has surged, yet consumer price inflation has remained relatively stable. In contrast, the supply shocks from COVID-19 and the Russia-Ukraine conflict have had more direct impacts. The scarcity of goods has made prices more sensitive to demand. The historically high gasoline prices illustrate this point.

Regarding asset price inflation, the significant increase in the money supply and low interest rates may be factors behind the rise in asset prices, along with other variables. However, as the Federal Reserve takes a tougher stance on monetary policy, the future of asset price inflation remains to be observed.

Visualizing the Three Different Types of
Inflation