What is inflation?

Nonetheless, because of the inflation rate’s volatility, inflation may be a source of an economic recession. This economic phenomenon affects many consumers and enterprises at different levels and continues to threaten the global economy. It is classified and rooted in the following circumstances and theories:

Cost-push inflation

It is the increase of prices on the input process, resulting in enterprises increasing prices of goods and services. There are various reasons there are higher costs of goods and services. It is based on the production costs of raw materials, labour, land, and many more. For instance, the rise in oil prices has resulted in additional energy costs reflected in the increasing prices of commodities.

Demand-pull theory of inflation

The surge in the supply of money and credit intensifies the demand for purchasing goods and services. Eventually, the rise in demand results in an increase in prices. Some of these examples include the decrease of banks’ interest rates that, in turn, amplifies the demands and property and vehicle prices. Governments printing money and banks acquiring loans, thus escalating money circulation and demand for commodities, also contribute to the demand-pull theory of inflation.

Built-in inflation

When expectations are set for rising prices, many people will bargain for higher wages to match their high living standards, causing a wage-price spiral or a cycle of consistently increasing salaries and commodity prices and reducing the purchasing power of consumers.

Social inflation

With the rise in litigation costs or legal dispute costs from monetary injuries, the prices paid by policyholders for insurance coverage increases.

Lifestyle inflation

Because of the people’s improved standard of living, consumers have more demand for goods and services. Eventually, demand for commodities and services augments in price value.

In the economic world, not everything inflates at the same rate. Inflation rates in finance vary across the globe. The prices of goods and services and income often have discrepancies depending on the economic activities and policies per country. For this reason, it is essential to monitor the inflation rate and analyse its instability and outcomes from consumer behaviour, investments, employment, and government programs. The higher and more unstable the inflation rate is, the more it shifts a country’s economy into recession.

GHD has a leading reputation for supporting clients and communities in the face of the global threat of inflation. We are an exceptional team from various industries, including energy, water, transportation, real estate, environment, industry, and government. We provide tactical and sustainable solutions to address critical economic situations and balance risk and opportunities. Through our advisory services, we deliver organisational and business improvements to empower businesses and organisations towards sustainable growth.

Articles referenced

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^{McKinsey & Company 2022, ‘What is inflation?’ retrieved June 7, 2023, from https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-inflation}

^{PIMCO n.d., ‘Inflation’, retrieved June 7, 2023, from https://europe.pimco.com/en-eu/resources/education/understanding-inflation}