Section 1.1: Inflation Trends Worldwide

Inflation has dominated discussions lately, with various nations grappling with escalating price levels that are influencing the global economic landscape. Countries such as the United States, the United Kingdom, and Canada are encountering inflation rates reminiscent of those not seen in the past forty years. A significant factor contributing to this recent surge in prices is the ongoing aftermath of the pandemic.

As consumer demand rebounded post-pandemic, fueled by exceptionally lenient monetary policies, inflation experienced a notable rise. Citizens in advanced economies found themselves with greater disposable income, leading to a scenario where excessive funds were pursuing limited goods. Compounding this demand issue were persistent supply chain disruptions.

To counteract the soaring inflation, many central banks are implementing aggressive interest rate hikes. While this strategy is the primary tool for curbing inflation, it carries the risk of triggering a recession. The pressing questions on many minds are how long it will take to stabilize inflation and whether such measures will lead to an economic downturn. Only time will provide clarity. For now, let’s delve into the three distinct forms of inflation prevalent in an economy.

Section 1.2: Types of Inflation

The "Markets in a Minute" infographic from New York Life Investments offers a glimpse into the U.S. economy since 1960. According to the data presented, there are three main types of inflation: Monetary Inflation, Consumer Price Inflation, and Asset Price Inflation.

Monetary inflation refers to the circulation of both physical and digital currency within the economy, which includes cash, checking accounts, and money market funds. This aspect is directly influenced by central bank policies, such as those enacted by the Federal Reserve in the U.S., and saw a remarkable increase of 25% between 2020 and 2021.

The second type, Consumer Price Inflation (CPI), is likely the one most familiar to the public. It reflects the average rise in prices for a basket of goods, including essentials like food, clothing, and housing. Various factors, such as supply chain disruptions, geopolitical tensions, monetary supply, and consumer demand, can influence CPI, which is currently experiencing unprecedented highs.

The final type pertains to the appreciation in the prices of stocks, bonds, real estate, and other financial assets over time. For this analysis, household net worth as a percentage of GDP was employed as a metric, reaching 620% in 2021. Typically, a low-interest-rate environment, like the one seen over the last decade, tends to promote increases in asset prices.

Returning to CPI, it remained relatively stable despite the substantial growth in money supply over the previous decade; however, supply shocks resulting from the pandemic and the conflict in Ukraine have significantly affected it.