Inflation is the rise in the cost of goods and services over time. This rise is measured in fiat currencies such as the dollar, yuan, euro, or rupee. Generally, inflation is caused by an increase in demand or a decrease in supply. The opposite of inflation is deflation, which is the fall in the prices of goods and services.
Types of Inflation and How to Solve Them
Inflation is categorized based on its causes, severity, and the actions taken by the government.
By Cause
In this categorization, inflation is classified by its origin: excess demand, short supply, or built-in systemic inflation.
- Demand Driven
- Supply Driven
- Built In
- By Severity
- Creeping Inflation
- Walking Inflation
- Galloping Inflation
- Hyperinflation
By the Government’s Role
- Open Inflation
- Suppressed Inflation
- Stagflation
- Core Inflation
What Causes Inflation?
Inflation is caused by any imbalance between demand and supply. Be it any kind of inflation, the demand or supply side is always in trouble. In all cases, too much money chasing too few goods causes inflation. The greater the demand-supply gap, the higher the inflation.
For example, in monetary inflation (a demand-driven form of inflation), too much money in the economy increases an individual’s buying power, who then seeks more goods and services than they would at their traditional level of demand. As a result, demand-driven inflation occurs.
Similarly, when there is a shortage of agricultural produce due to bad weather or other reasons, supply tightens, and prices rise, causing inflation.
Effects
Inflation reduces an individual’s buying power because the prices of necessary items rise, causing a shortfall in the budget for other items. The result of this is that people invest less in assets such as stocks, gold, cryptocurrencies, and other non-critical items. We see a general trend of decline in these markets.
A similar situation occurred in 2025 when inflation remained above 3% in the USA, prompting the Federal Reserve to delay interest rate cuts. Higher-than-average interest rates triggered a liquidity crisis in stocks and cryptocurrencies, leading to a general decline in those markets.
Disclaimer: All information provided on this site is purely educational and should not be considered financial advice under any circumstances. Kindly consult your financial advisor before investing.
