Central banks typically aim to target a low and steady rate of creeping inflation by using monetary policy tools such as interest rate adjustments and open market operations.
What is Creeping Inflation: Examples, Causes & Rate
What Is Creeping Inflation?
What Is the Rate of Creeping Inflation?
What Are the Causes of Creeping Inflation?
The following 8 factors can give rise to creeping inflation in an economy:
- Gradual increase in the prices of everyday items such as food, clothing, and household goods.
- Increase in the cost of housing over time, including rent, utilities, and mortgage payments.
- Slow rise in the cost of medical services and healthcare.
- Increase in the cost of education, including tuition fees, textbooks, and other academic expenses.
- Slow rise in the cost of transportation, including fuel, car maintenance, and public transit fares.
- Gradual increase in the cost of leisure activities such as dining out, entertainment, and travel.
- Increase in the cost of consumer goods such as electronics, appliances, and furniture.
- Slow rise in the cost of financial services such as banking fees and insurance premiums.
These factors do not have to be mutually exclusive – they can interact and reinforce one another, resulting in increased inflation.
What Are the Examples of Creeping Inflation?
Creeping inflation is a widespread phenomenon, and here are 3 examples of creeping inflation:
- The 1970s and ‘80s were characterised by way higher rates of creeping inflation, which were caused by the supply-side mishaps such as the oil price increase of the 1970s and the unpolished monetary policies of the 1960s.
- The past 2 decades have experienced creeping inflation rates of about 2% in both the United States and Great Britain, with the only anomaly being the period leading to the economic crisis of 2008.
- In more recent times, the global pandemic’s aftermath during the period of 2020 to 2022 has led to inflationary pressures due to overly loose fiscal and monetary policies, which pose a significant financial threat in the foreseeable future.
What Is Overall Inflation?
Inflation also referred to as overall inflation, is measured by the CPI. It includes both creeping inflation and any sudden spikes in prices that may occur. Meaning overall inflation can be higher than creeping inflation upon sudden price spikes.
The following factors can cause overall inflation:
- Monetary Inflation: It is when an economy’s money supply grows faster than the pace of economic growth, resulting in a reduction in the buying power of money.
- Cost-push Inflation: This occurs when the cost of producing products and services rises, resulting in increased consumer prices.
- Demand-pull Inflation: It is when an economy’s total level of demand for goods and services exceeds the available supply, causing prices to rise.
What Are the Differences Between Creeping and Overall Inflations?
Understanding the difference between these two can provide a complete picture of the state of an economy and the factors that are driving changes in prices. Here are the differences between creeping and overall inflations:
Creeping inflation is a slow and steady increase in prices over time.
Overall inflation is the overall rate of inflation, including creeping and sudden price spikes.
Creeping inflation is more predictable and easier to manage.
Overall inflation can be more disruptive and lead to economic instability.
How To Combat
Central banks aim to target a low and steady rate of creeping inflation to maintain stability in the economy.
Sudden changes in overall inflation may require different policy responses.
Creeping vs Overall Inflation - Which Is More Dangerous for the Economy?
Inflation, whether it is creeping or overall, can have adverse effects on the economy. Here is which one is more dangerous out of these two types:
- Creeping inflation erodes the purchasing power of consumers over time.
- Creeping inflation makes it more challenging to afford goods and services.
- Overall inflation can often be more widespread and disruptive.
- Overall inflation leads to economic instability if it spikes suddenly.
Thus, overall inflation is supposedly more dangerous for the economy, as it can lead to sudden changes in prices that can be difficult for businesses and consumers to adapt to.
Ergo, sudden changes in creeping inflation may require different policy responses from both central banks and governments to stabilise the economy.
FAQs About Creeping Inflation
One way to protect your finances from the effects of creeping inflation is by investing in assets that tend to increase in value in inflationary environments, such as stocks or real estate. Another strategy is to have a well-diversified portfolio that includes both fixed-income and equity assets.
Creeping inflation is more predictable and easier to manage as it is a slow and steady increase in prices over time. Overall inflation, on the other hand, can be more disruptive and lead to economic instability due to sudden spikes in prices.
Creeping inflation is usually characterised by an annual rate of 2-3%. Overall inflation, on the other hand, can fluctuate and be affected by sudden spikes in prices.
Creeping inflation can affect the economy by decreasing purchasing power, leading to an increase in unemployment and declining economic growth. Overall inflation, on the other hand, can be more disruptive and lead to financial instability.
Both creeping and overall inflation can have adverse effects on the economy. However, creeping inflation is not always bad for the economy. A moderate and steady rate of it is usually ideal for an economy to grow.
Whereas overall inflation is supposedly more dangerous for the economy as it can lead to sudden changes in prices that can be difficult for businesses and consumers to adapt to.
Central banks and governments typically aim to target a low and steady rate of creeping inflation by using monetary policy tools such as interest rate adjustments and open market operations. It is as such since creeping inflation is supposedly more manageable and less disruptive for the economy.
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