Inflation is the overall rise in the prices of goods and services over time. The annual inflation rate in the United States averaged 3.27% between 1914 and 2022.  So moderate inflation has been a fact of life and the natural economic state for more than a century.

That makes it important to distinguish between the inherent effects of inflation of any rate and those that only come into play during periods when inflation runs unusually high. We’ll do that below in identifying inflation’s most important effects on consumers, investors, and the economy.

The effect depends on the type of inflation. For example, walking inflation is 3% to 10% per year. Creeping inflation is milder than walking inflation while running inflation implies a more aggressive rise in prices that could be a precursor to hyperinflation.1

Rising prices may be an indication of an economy growing very fast. People buy more than they need to avoid tomorrow’s higher prices fuel demand for goods and services. Suppliers can’t keep up. More importantly, neither can wages. As a result, everyday goods and services are priced out of most people’s reach.

During inflation, creditors lose because they receive in effect less in goods and services than if they had received the repayments during a period of low prices. Debtors, on the other hand, as a group gain during inflation, since they repay their debts in a currency that has lost its value (i.e., the same currency unit will now buy fewer goods and services).

What is the picture in big developing economies?

In contrast to rich countries, the picture is more mixed, depending on local factors, according to William Jackson, chief emerging markets economist at Capital Economics consultancy.

In Turkey, for example, inflation hit 48.7% in January, with the lira’s crash last year seen as the principal cause.

But in other large emerging markets, such as Brazil, Russia and Mexico, consumers are seeing outgoings rise quickly due partly to the impact of higher global energy prices.

They reported annual inflation last year of 10%, 8.4% and 7.4%, respectively.

But not all big emerging markets have seen a pronounced increase in consumer prices due to supply bottlenecks linked to the pandemic, notably China, where inflation is running at 1.5%.

“Goods shortages haven’t had the same effect and, in China’s case, it helps that it’s a global manufacturing powerhouse,” Jackson told the Thomson Reuters Foundation.

“A lot of the supplies concentrate there, so it’s easier for manufacturers to secure those supplies.” 

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