Types of Inflation
Demand-pull, cost-push — same number, opposite fix
- Tell demand-pull from cost-push inflation
- Explain why the CB response differs for each
- Spot which type is happening from the data mix
Two countries both report 6% inflation. One CB hikes 50bp the next day. The other holds. Why? Because the *type* of inflation matters more than the level.
Demand-pull — too many buyers
Demand-pull inflation is what happens when an economy is running hot — strong wages, low unemployment, consumers buying everything they can. Prices rise because demand exceeds supply. The fix: higher rates to cool spending. CB hikes. Currency strengthens.
Cost-push — supply shock
Cost-push inflation is what happens when something on the supply side spikes — oil embargo, war, broken supply chain. Prices rise but the economy isn't booming. Hiking rates won't fix the actual problem; it just adds pain. CBs often *hold* even with high CPI.
Hot wages, low unemployment, strong PMI, retail sales rising. The economy is running ahead of itself. Higher rates cool it.
Inflation up + growth slowing + commodity spike. Hiking would worsen the slowdown without addressing the supply side. Stagflation risk.
CPI prints 5%, but unemployment just rose and PMI dropped. CB likely action?
- Demand-pull = economy hot, hiking works → currency up
- Cost-push = supply shock, hiking hurts more than helps → currency direction depends on growth fears
- The same CPI number can be a hike signal or a hold signal — depends on the mix
- Stagflation = the worst of both worlds
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