Three types of inflation

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

Prices for everyday goods, including food and energy, are the most widely cited type of inflation, but there are other forms of inflation in the broader economic system.

In the “New York Life Investment One-Minute Market Overview,” we've mapped the three types of inflation and the macroeconomic factors affecting each type.

1. currency inflation

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

The US Central Bank usually affects the money supply by printing money, buying bonds, or changing bank reserve requirements. Central banks control the money supply to stimulate the economy or curb inflation and keep prices stable.

In response to the COVID-19 crisis, the money supply increased by approximately between 2020 and 2021
25%, a record. Since then, as the economy showed signs of strength, the Federal Reserve began to scale back its bond purchases.

It is worth noting that, in theory, the money supply is growing faster than actual output may cause consumer prices to rise, especially when the speed of money circulation (speed of currency transactions) is high. The reason was that there was more money chasing the same quantity of goods, which ultimately led to higher prices.

2. consumer price inflation

Consumer price inflation occurs when prices for goods and services increase. It is usually measured by the Consumer Price Index (CPI), which shows an increase in the average price of a basket of goods, such as food, clothing, and housing.

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

CPI rose 8.6% year on year in May, the highest level in 40 years. Russia-Ukraine conflict and
COVID-19 has caused widespread disruptions in the supply chain from oil to wheat, leading to increased pressure on global prices.

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

3. Asset price inflation

Asset price inflation represents an increase in the prices of stocks, bonds, real estate, and other financial assets over time. Although there are a number of ways to show asset price inflation, we'll use household net assets as a percentage of GDP.

Generally, a low interest rate environment has created a favorable environment for asset prices. This has been seen over the past decade because low borrowing costs have been matched by rising asset prices and strong investor confidence.
Household net assets as a percentage of GDP in 2021 were 620%.

How types of inflation affect you

As currency inflates, businesses and consumers can dispose of more money, which may stimulate demand and further increase overall economic inflation.

However, the extent of this impact on consumer price inflation is unknown. In the past decade, the money supply has surged, but consumer price inflation has remained relatively stable. In contrast, the supply shocks brought about by COVID-19 and the Russian-Ukrainian conflict have had a more direct impact. The impact of scarce commodities has made prices more sensitive to demand. This can be seen when gasoline prices hit record highs.

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

Visualizing the Three Different Types of
inflation