Types of Inflation

According to new Keynesian macroeconomic (economics to do with behaviour of economy) theory, there are 3 forms of inflation which form up the 'triangle model': 'demand-pull inflation', 'cost-push inflation', and 'built-in inflation'. These forms of inflation hence constitute the causes of inflation according to Keynesian theory. 

Demand-pull Inflation

Demand-pull inflation refers to inflation due to excessive aggregate demand or total expenditure in an economy. This can be due to many reasons, such as increased consumer outlook. When the economy seems set to improve, people tend to spend more. 

Cost-push inflation

Cost-push inflation refers to inflation due to increased business costs, which may include higher import, export and investment costs, among others. Similarly, this is the most common cause for inflation in Singapore due to our country being land-scarce and our nature as a trading hub, most of our goods and materials are imported from abroad. As such, due to most of our goods used for production and consumption being imported from abroad, rising import costs often causes Singapore to experience increased inflation.

Built-in Inflation

Although not as relevant in Singapore today, built-in inflation was a common reason for inflation in the past. Due to the price spiral, caused by everyone attempting to keep up with inflation, firms pass off higher labour costs to consumers as higher prices, leading to a vicious circle of ever-increasing inflation.

Now that we've understood the three basic types of inflation that form the Triangle Model, let us examine the effects that inflation plays on a country like Singapore, and why.