Stagflation And Other Types Of Inflation In The Economy

Inflation – you’ve likely heard or read about it recently. Even if you’ve never heard the term, you’ve likely experienced it at the grocery store, car dealership, gas pumps or other places you spend money. 

It isn’t just inflation that can have an impact on your money – both now and in the future. There are other types of inflation that can play a part, too. Knowing these terms and understanding how they impact your wallet can help you be more strategic with your dollar.

What Is Inflation?

Inflation is the rate at which the price of goods and services increases over a certain period of time. These purchases often meet one’s basic needs and may include food, fuel, entertainment, utilities and transportation.

The term also relates to the purchasing power of money. When inflation rises and prices increase, the dollar’s value decreases, and it can’t buy as many goods or services as it did for the same amount in the past.

Oppositely, deflation is the rate at which prices go down and purchasing power goes up. This typically occurs when there’s economic downturn and high unemployment, as there’s typically less consumer spending and a higher focus on saving.

What Causes Inflation?

In basic terms, inflation typically happens when there is a decrease in the supply of goods and services or an increase in demand. For example, as we’ve seen during the COVID-19 pandemic, supply chain issues, a reduced workforce, fiscal stimulus and conflicts in other countries can all contribute to more demand and less supply, thus, raising prices. That said, there are other types of inflation you may want to understand.

The Other Types Of Inflation

There are several different types of inflation you may have heard of from economists, personal finance reporters and in conversations with colleagues. Here are a few common terms to know. Keep in mind that they may not describe current economic conditions.

Hyperinflation

Hyperinflation is very high inflation that rapidly increases. When it occurs, prices surge and can quickly get out of control. While economists define hyperinflation by different factors, it generally happens when the rate of inflation goes up 50% or more a month or annual inflation reaches at least 1000%. While hyperinflation is rare, it usually occurs in underdeveloped countries, and has never happened in the U.S.

Stagflation

Stagflation happens when economic growth slows, inflation remains elevated and there’s an increase in unemployment caused by a shortage of skilled workers, rather than supply and demand. This makes it difficult for governments to fight stagflation, as measures they might usually take to fight inflation could worsen unemployment rates.

Shrinkflation

Shrinkflation occurs when product sizes shrink – whether by quantity, weight or size – while their prices stay the same or continue to grow. In essence, you pay the same price or more for less product.

How Inflation Affects Your Life

Every person’s financial situation is different, and inflation will impact each person differently. The obvious way inflation affects your life is that you spend more money for the same items. That means paychecks may not go as far and some people may have a harder time affording even necessities. Because of rising prices, you may need to review and change your personal budget, cutting costs and sacrificing in some categories like entertainment, dining out and clothing. You can easily cancel subscriptions and monitor your budget, including custom categories using Rocket Money^SM. With a need for more money, you may also have to reduce your saving or other financial goals or get a side hustle to help supplement your income.

Those who are nearing retirement or in retirement may be negatively affected by prices that are more than what they planned to spend in retirement. Therefore, it’s important to account for the increased price of goods and services when saving for retirement. However, saving more can be difficult if you need extra money to pay for higher expenses along the way. This is where having a strong understanding of where your money goes can be helpful, to adjust as necessary.

If you plan to borrow money – for things like a home, car or vacation – inflation will likely also affect how much it costs to borrow that money. That’s because when inflation is high, the Federal Reserve will typically raise interest rates to help cool the inflation rate, and the higher the interest rate, the more expensive it becomes to borrow money over time.

Ways To Fight Inflation

While you can’t control what inflation does, you can try to find ways to lessen the impact. Here are a few ideas.

Increase your income: If possible, increasing your income is one of the quickest ways to deal with increased costs. Consider asking for a raise at work or getting a side hustle.

Consider your meals and ingredients: In a 2022 survey by Morning Consult, shoppers saw shrinkflation affecting snacks, pantry items and frozen foods the most, with meat following close behind. It may help to buy fresh foods or go meatless for a few meals each week to avoid paying the same amount for less.

Be strategic at the grocery store: Generic items are typically less expensive than brands. It may also be more cost effective to buy certain items in bulk. When shopping, compare each item’s unit price (which may be the price per pound, ounce or other measurement) to see which item gives you the best deal.

Update your budget and track your spending: See where you can cut costs and where you may need to increase your budget. You’ll likely need to increase your budget for groceries, gas and utilities. The first place to cut costs are in categories that are based on wants, not needs. Always track your spending so you know where your money is going and in what areas your spending has increased.

Negotiate bills: You may be able to lower monthly bills or find better rates, freeing up some money and adding more flexibility in your budget. Rocket Money can also help here, with an 85% success rate in negotiating bills for customers. Simply ask for a review on the Dashboard or Recurring tab.  

Keep your credit in check: Continue to make payments on time and work toward paying off your debt. These actions can help improve your credit score. Higher credit scores often produce better loan terms, including lower interest rates, which make it less expensive for you to borrow if necessary.

Bottom Line: Be Patient And Strategic Until Prices Decline

Inflation is often caused by a drop in supply and increase in demand. While there isn’t much you can do to stop it, there are ways to minimize the impact on your finances and your life. Inflation will impact each person differently, but everyone can benefit from budgeting, shopping wisely, negotiating bills and keeping track of their credit. Rocket Money can help by automatically tracking your credit score or negotiating your bills on your behalf. Get help managing your finances and sign up for Rocket Money today!