Types Of Inflation

Did you know there are several types of inflation? Each type of inflation affects the economy differently. In order to understand the effects of inflation, you need to understand what inflation is and how it works.

Inflation
Inflation happens when prices of goods and services rise. This is usually an indication that the economy is growing and that consumers are spending money. Inflation can be good for you if your wages increase at the same time and rate as prices increase. It simply means there is plenty of give and take in the money supply as consumers consume and producers produce, paying their workers as they produce more products. Inflation while workers' incomes decrease is damaging for the economy in the long run because consumers stop spending to save money, causing vendors to be stuck with extra inventory and overpriced goods and services. This usually ends in a correction of the market as money supply and demand reconcile.

Deflation
Deflation occurs when the prices of goods and services fall, the exact opposite of inflation. Deflation can increase the purchasing power of the dollar if wages do not fall at the same rate prices fall. However, deflation is usually an indication that the economy is lagging and that consumers are not spending. It can also be an indication that the market is correcting itself after a time of inflation.

Hyperinflation
Hyperinflation takes place when prices of goods and services rise rapidly. This quick rise in prices can offset the balance of the economy, since wages usually don't rise enough to compensate for the increase in expenses.

Stagflation
Stagflation is the dreaded combination of low wages and rapid inflation. Unemployment levels are high, prices keep going up and consumers stop consuming during a period of stagflation. Companies raise prices to try to stay afloat, but consumers can't buy because they either can't find work or aren't making enough, which results in economic challenges.

Since not all inflation is bad, you don't need to panic every time you hear the mention of inflation on television. You just need to be able to recognize potential signs of inflation so you can be prepared.