What's With All The 'Flations? Inflation, Shrinkflation, Greedflation...

Right now, inflation is on everyone’s mind. As of September 2022, Canada’s inflation sits at a worrying 6.9%. While this is down from June’s 30-year-high of 8.1%, it still means that your money doesn't stretch as far. High inflation translates into higher prices for everything–from haircuts to hamburgers–and is a problem when salaries don’t grow to match the rising costs.

But inflation isn’t the only ‘flation making the news: We’ve also got to contend with stagflation, deflation, and more. Read on to learn the difference between all these terms and impress people at parties with your knowledge of economics.

What is Inflation?

So what is inflation, anyways? Inflation is the rate at which the prices for goods and services rise and, as a result, the purchasing power of currency falls. The leading causes of inflation are a) too much money chasing too few goods or b) increases in production costs (e.g. wages, rents, materials, etc.).

What's the Problem With Inflation — and Can it be Stopped?

When inflation is high, your money doesn’t go as far towards paying for the things you need, such as groceries, home insurance and car repairs. Businesses might suffer because their costs have increased, but their revenue has not. Generally, a small amount of inflation, around one to three per cent, is healthy. But inflation right now is twice as much as that.

This also might cause issues for people in retirement: all of sudden, the money they saved doesn’t buy as much as they planned. In a nutshell, inflation can cause financial instability and reduce economic growth.

One of the ways that the Bank of Canada tries to slow inflation is by introducing rate hikes. We’ve had five of them since January, and experts think more are on the way until the inflation rate slows. (We’ll see if the predictions come true when the Bank makes its next announcement on October 26, 2022.) 

The Bank of Canada uses these rate hikes to help control the money supply, reduce demand, and keep inflation under control. The downside is that these higher rates mean that anyone with any kind of debt, like a mortgage or car payment, is sweating a bit right now because their monthly payments keep increasing. 

What About the Other ‘Flations?

As you may have heard in the news, inflation isn’t the only ‘flation we need to worry about. There are several other economic phenomena and trends that can affect the value of your money.

What is Shrinkflation?

Shrinkflation is when prices rise, but the quality or quantity of goods and services falls. For example, the price you pay for a bag of rice may remain the same, but the size might decrease (or shrink) from 8.5 oz to 8 oz, effectively making it a more expensive product.

Shrinkflation can be caused by a decrease in money supply, as companies cut back on the amount or quality of their products in order to reduce costs. It can also be caused by an increase in government regulation, which can make it more expensive for companies to produce the same amount or quality of goods and services.

There are lots of examples of shrinkflation going around. Food policy and distribution researcher  Sylvain Charlebois points out a few on his Twitter account, and The Globe and Mail has noted the trend as well.

What is Greedflation?

Greedflation is the idea that some big companies exploit rising inflation by raising their prices even more than is necessary, in order to maximize profits. You might have heard the term used in the news a lot recently, as the federal government has recently launched an investigation into grocery store profits. Many people argue that it’s unfair that large grocery chains are seeing rising profits while the price of food increases, leaving many Canadians struggling to put food on the table.

What is Deflation?

Deflation is the opposite of inflation: we’re dealing with falling prices instead of rising prices. It can be caused by an increased supply of goods and services or decreased demand. For example, demand might decrease if interest rates are higher and people are more inclined to save rather than spend. On the business side of things, less demand might lead to layoffs and business failures. And deflation can make it difficult for businesses to repay their debts since the value of their collateral falls.

Worst-case scenario, we enter into the dreaded deflationary spiral, which is when prices of goods and services fall, leading to less spending by businesses and consumers. This can cause companies to fail and people to lose their jobs. As a result, less money is in circulation, which can further exacerbate economic problems and lead to a recession. 

Deflationary spirals are pretty bad for individual businesses and the economy as a whole. While inflation, which definitely has its own problems, is typically not as bad.

What is Disinflation?

Like a balloon slowly leaking its air supply, disinflation is when the rate of inflation slows down. This is good for businesses and consumers because it means that prices are not rising as quickly. Disinflation can signal that we are going to see a spiral of falling prices and demand. And if the rate slows too much, we might see businesses fail, and people lose their jobs. However, it is not on the same scale as deflation, which is pretty much the worst.

What is Stagflation?

Stagflation is an unfortunate combination of high inflation and high unemployment. This is bad for businesses and consumers because it means that they can buy less with their money, and there are fewer jobs available. 

There are a number of factors that can cause stagflation. One factor is an increase in the price of oil, which can lead to higher inflation and lower economic growth. Another factor is a decrease in overall demand, which can lead to higher unemployment and lower inflation. Finally, a third factor is poor economic policies, which can lead to both higher inflation and higher unemployment.

Stagflation can lead to a spiral (another one!) of falling prices and demand, which can cause businesses to fail and people to lose their jobs. It can also make it difficult for businesses to repay their debts, which can lead to bankruptcy. Finally, stagflation can reduce the amount of money in circulation, which can lead to a recession.

What is Hyperinflation?

Hyperinflation is a very high inflation rate, with prices rising extremely fast. This can be caused by an increase in the money supply or an increase in government spending. Hyperinflation can lead to a complete loss of confidence in a currency, as people try to get rid of their money before it loses all its value.

There are a number of reasons why hyperinflation can occur. One reason is that the government prints too much money. This can lead to higher prices and lower economic growth. Another reason is that there is a decrease in overall demand, which can lead to higher inflation and lower economic growth. Finally, a third reason is poor economic policies, which can lead to both higher inflation and higher unemployment.

How to Handle Financial Instability

Regardless of which ‘flation we are currently dealing with, you should be ready. These general personal finance guidelines can help you deal with everything from rising prices to rate hikes. 

• Set up an emergency fund: An emergency fund is essential because it can help you cover unexpected costs in the event that you lose your job or you can’t work for some reason. If you have an emergency, you can avoid taking on debt if something unexpected happens. And with climbing interest rates, avoiding debt is a great idea. Most experts recommend saving 3-6 months of expenses in an emergency fund. 

• Shop around: Inflation can cause prices to vary widely, so it’s important to shop around and compare prices before making any big purchases. There are many different apps you can download that alert you to special offers on the items you buy regularly, and/or help you compare prices across different stores.

• Budget: Having a budget can help you track your expenses and ensure you are not spending more than you can afford. It's a good idea to write out all your necessary monthly expenses, subtract this amount from your income, then from there you can work out how much you have left for discretionary spending on non-necessities and how much you can save.

The Bottom Line

In conclusion, it is important to be prepared for whatever economic conditions may arise. Whether we are dealing with inflation, deflation, stagflation, or hyperinflation, there are steps we can take to protect ourselves. By setting up an emergency fund, diversifying our investment portfolios, shopping around, and budgeting, we can help offset the effects of these conditions and keep our finances healthy, regardless of how alarming the headlines in the news might be.