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With prices hitting a 40-year high, inflation dominates the news.
Prices of daily necessities including food and energy are the most commonly cited types of inflation, but there are other forms of inflation in a broader economic system.
In 'New York Life Investment One-Minute Market Introduction', we illustrate three types of inflation and the macroeconomic factors influencing each type.
1. Monetary inflation
When the US money supply increases over time, currency inflation occurs. This represents the physical and digital currency circulating in the economy, including cash, checking accounts, and money market mutual funds.
The Federal Reserve typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. Central banks control the money supply to stimulate the economy, suppress inflation, and maintain price stability.
To address the COVID-19 crisis, the money supply increased by approximately 25% between 2020 and 2021, setting a historical record.
Since then, with the economy showing strong signs, the Federal Reserve has begun to reduce its bond purchase scale.
It is worth noting that, theoretically, a faster growth rate of money supply than the actual output growth rate may lead to consumer price inflation, especially when the velocity of money circulation (monetary transaction speed) is high. The reason is that there is more money chasing the same amount of goods, which ultimately leads to price increases.
2. Consumer Price Inflation
When prices of goods and services rise, consumer price inflation occurs. It is typically caused by consumers...