3 types of inflation and what they mean for families

Remember hearing your elders talk about going to the movies for a quarter? If you've been experiencing sticker shock from food prices at the grocery store lately (and who hasn't?), you might do some reminiscing of your own about days when you went to the movies for a mere 5 bucks. All thanks to that pesky little part of economics called inflation.

Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money over time. Inflation affects us all, from the price of groceries to the rapidly rising cost of college tuition for your kids. 

However, there are different types of inflation, each with its own causes and effects. Knowing what inflation is and the differences between the types of inflation can help you make better financial decisions.

What is inflation?

Inflation is when prices for goods and services go up over time, which makes your money worth a little less. That means it takes more money to buy the same things you always buy, such as your weekly groceries, gas for the car, or even a trip to the movies.

Neven Valev, Head of Research at TheGlobalEconomy.com, explains it like this: “Inflation is the rate at which prices increase. However, this rate of increase depends on what a particular household or individual buys. For example, lower-income households spend more of their income on groceries. Therefore, when grocery prices increase faster than other prices, lower-income households experience a higher rate of inflation than higher-income households.”

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What causes inflation?

Inflation can happen for a bunch of reasons, from supply chain issues to major shifts in the economy. Sometimes it creeps up slowly. Other times it hits all at once, like when rent suddenly jumps at the end of a lease.

Tansley Stearns, president and CEO of Community Financial Credit Union and leader of the Backbone Coalition, explains: “Inflation can be felt in small and big ways in everyday life. Over time, what may seem like small price increases take a larger and larger bite out of the family budget, reducing your options, making it harder to save, and squeezing out the fun stuff. It can also lead to very tough choices.”

3 types of inflation explained

When inflation is high, you might seek out better deals to stretch your paycheck. In a moderate-inflation or high-inflation environment, having a strategy for spending, saving, and investing is especially important to prevent inflation from eroding your purchasing power.

There are three main types of inflation, and each one works a little differently. Here’s what families need to know.

1. Cost-push inflation: Increased cost of production

Picture this: Production costs increase, and businesses pass those costs on to you. Boom, prices rise. This can happen due to higher wages, pricier raw materials, or new taxes. Imagine oil prices shooting up — suddenly, transportation costs soar, and everything from groceries to your favorite delivery orders is more expensive.

For a real-world example, look at the grocery store. The COVID-19 pandemic threw a wrench into supply chains, hiking up transportation and labor costs. As a result, many everyday essentials, such as bread, milk, and vegetables, suddenly cost more. This example of cost-push inflation made many of us rethink our shopping lists. 

As Valev puts it: “Over the last five years, the price of gas in the U.S. has hit a low of $2.15 per gallon at the start of the pandemic in 2020 and a high of $5.20 per gallon at the start of the Ukraine war. The price of a dozen eggs has fluctuated between $3 and over $8. These are real, visible price changes that affect budgets and impact how people think of overall inflation and their financial situation.”

Chris Heerlein, CEO at REAP Financial, shared a very relatable example: “One client noticed their landscaping service went from $60 to $95 a visit in just 12 months. Nothing about the service changed, but rising labor and fuel costs drove the jump.”

2. Demand-pull inflation: Demand exceeds supply

Demand-pull inflation kicks in when the economy's booming. When people spend more, but the supply chain can't keep up, prices climb. Think of a booming job market where people tend to have extra spending money — they’re buying more, but businesses may not be able to meet the demand.

When this demand imbalance happens on a large enough scale, it affects aggregate demand, which represents the total spending on goods and services in an economy. This increased demand can lead to higher consumer prices across the board. Conversely, if the total supply of goods and services, known as aggregate supply, is insufficient to meet this demand, it can also contribute to rising prices.

During the housing market frenzy, lots of people wanted to buy homes, but there weren’t enough to go around. So prices soared. Stearns points to this, saying: “A recent Federal Reserve Bank of St. Louis FRED report shows that between early 2020, when the pandemic started, and the end of 2024, house prices went from an average of $371,000 to $510,900 — a 37% increase.” The result? Skyrocketing prices make it increasingly difficult for families to afford their dream home.

3. Built-in inflation: Increase in prices and wages

Built-in inflation, also known as wage-price inflation, is a tug-of-war between wages and prices. Workers want higher wages to keep up with living costs, and businesses raise prices to cover these wage hikes. It’s a cycle where each one fuels the other, pushing both wages and prices higher and higher.

Look at the tech industry: As living costs rise, tech companies often bump up salaries to attract and keep top talent. Those same companies may raise prices on their products and services to balance the higher wages. Suddenly, your devices and subscriptions are more expensive.

Additional factors contributing to inflation

• Government policy. All sorts of government decisions affect the economy, but increased money supply controlled by the Federal Reserve often has the most direct effect on inflation. The Fed sets the federal funds rate, which determines how expensive or inexpensive it is for businesses and individuals to borrow money, also known as interest rates. When the Fed lowers interest rates, borrowing becomes less expensive, encouraging spending and investment. But lower rates also tend to increase the amount of money circulating in the economy. This can lead to more dollars chasing the same goods and services, which tends to drive up prices and contribute to inflation.

• Currency depreciation. Changes in the value of a country's currency can lead to inflation, especially in nations that import a lot of goods. If the value of the money weakens, imported goods become more expensive, which may lead to overall price inflation. For example, if the U.S. dollar is weaker than the euro, Italian olive oil or European-made appliances are suddenly no longer such a steal. This shift means you’d end up getting less bang for your buck, making those European imports even more of a luxury for American shoppers.

• Greedflation. Inflation isn’t always due to economic factors. Sometimes, businesses raise their prices to boost revenue and profit.

Who benefits from inflation?

It might sound surprising, but not everyone loses during inflation. People with fixed-rate loans often benefit because they’re paying back the same dollar amount while the value of money goes down.

Some investments, such as real estate or certain stocks, tend to appreciate with inflation. According to Valev: “If you have investments, keep in mind that stocks and real estate prices tend to rise with inflation, while bond prices do not.”

Governments can sometimes come out ahead as well. When prices rise, the value of money goes down, which means it can cost the government less (in real terms) to pay off what it already owes. Plus, if wages and prices go up across the board, the government tends to collect more in taxes, even without raising tax rates.

Big brands with loyal customers might also see a boost. If they can raise prices without losing sales, they may end up making more money during inflation than they did before.

5 ways families can keep up with inflation

With the right strategies, you can protect your purchasing power and even come out ahead. Being prepared is a better strategy than simply wishing and wondering when inflation will decrease. Here's how you can stretch your hard-earned money further.

1. Diversify like a pro. One way to help mitigate the impact of inflation is by diversifying your investments. Spread your money across assets that typically outpace inflation, like certain stocks, real estate, or inflation-protected securities.

2. Automate your savings. Set up small automatic transfers each month and increase them over time. Heerlein explains: “That helps your financial habits rise with your cost of living. And involve the kids; give them a set amount to manage one household category, such as snacks or weekend outings. It teaches real trade-offs in a high-cost world.”

3. Ask for a raise. Now may be the perfect time to bring it up. Valev suggests: “When inflation is widely reported in the media, everyone becomes mindful of it, and it is easier to ask for an increase in compensation.”

4. Stay on top of your budget. Regularly review and adjust your budget to stay ahead of the game. Whether it's renegotiating service contracts, cutting unnecessary expenses, or earning interest with a high-yield savings account, being proactive can help you stay on solid financial footing. Stearns notes that “credit unions offer higher rates on savings accounts and lower rates on loans compared to traditional banks, helping families save more and spend less.”

5. Watch for sneaky price hikes. Keep an eye on subscriptions, activities, and other daily expenses. Heerlein says, “Streaming services, school lunches, kids’ activities, these don’t grab headlines, but together they can quietly add hundreds a month to your budget.”

Inflation can impact both your weekly grocery expenses and your long-term financial goals. It can make it harder to save for college, plan for vacations, or just enjoy a little financial breathing room. That’s why understanding the types of inflation— and knowing how to respond — is so important. As Valev points out: “To plan, stay informed and look forward, not backward.”

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