What’s a high rate of inflation? It depends on whom you’re asking because the employee who hasn’t had a raise in five years and is facing ever-increasing prices on everything from toilet paper to beer likely has a few thoughts on what he considers to be high inflation. Plus, it’s one thing to designate a single year’s rate of inflation as being high, but cumulative effects of inflation over a few years of just "healthy" inflation can be akin to the proverbial Chinese water torture: drop after drop of increasing expense adding up for those who are struggling to get by.

However, inflation drives a strong economy too, so it’s desirable within limits. What’s the right amount of inflation, and what’s too much?


In the United States, a healthy inflation rate is between 1% and 5%. If it's higher than 5%, wages can't keep up. In other countries where inflation may be the norm, "high" might be as much as 30% per annum. The worldwide average is 2% for developed nations and 5% for emerging markets.

Inflation: Real-World Examples

Inflation is essentially that slow, creeping increase in how much things cost, or, the slow, steady decline of how much a dollar is worth. They’re essentially the same thing, though. How much did a can of soda cost when you were a kid, and what do you pay now? That difference in price is inflation.

In 1964, you could buy a sleek new Ford Mustang for $2,368, you could see a movie for under a buck and you paid just 27 cents for a gallon of gas. Today, a 2020 Mustang Fastback coupe will set you back $26,670, a movie costs $10 on average and a gallon of gas is around $3. Everything is at least 10 times more than it was back then, and that’s the price of inflation. Nowhere on Earth is immune to the reach of inflation.

Knowing the value of a dollar can give you perspective on the change in inflation over time. Online inflation calculators can often tell you the change in a dollar’s value from as far back as 1800.

Types of Inflation: A Glossary

  • Inflation is the amount of increase in prices over a month or year, and an average amount in developed countries tends to be about a 2% annual increase. So, if you buy a loaf of bread for $1.50 today, it should be $1.53 for the same bread next year at a 2% rate of inflation. In emerging markets, a 5% rate of inflation is the average worldwide.

  • Deflation is when prices descend or “crash”, like with home values after the 2008 economic crash. Housing prices deflated. This is not the same as a liquidation sale or prices that are lowered because a manufacturer improves its processes. It’s when the market cannot sustain previous prices, and demand decreases, so the products (like houses and cars) experience falling prices.

  • Stagflation is what happens if you get inflation happening at the same time as an economic recession. It’s somewhat rare, but it does happen, as anyone who lived through the 1970s in America can attest. It’s when there’s slow to no growth combined with high inflation and high unemployment.

  • Hyperinflation is when the cost of living is runaway and inflation is skyrocketing by 50% monthly or more. It would mean a $1 loaf of bread on January 1 of this year would top $130 by January 1 of the following year.

  • Cost-push inflation happens when there’s plenty of demand, but supply is restricted, like when OPEC reduces oil supplied to the market or when gas lines were damaged after Hurricane Katrina and prices skyrocketed to $5 per gallon.

  • Demand-pull inflation is more common than cost-push, and it’s when demand is strong, but supplies can’t meet the demand, causing inflation and inflated pricing. Several things can cause this, and even tech releases can induce inflation by not being able to meet market demand, like with the iPhone in its early years. The biggest and best example is when governments lower income taxes, people have more money, people spend more money and the market grows but consumer demand is high and is not being met adequately, so prices escalate for the available supply — thus, causing inflation.

  • Recession is when the economy hits a downturn, but it technically has to be a contraction of the GDP for at least six months or two quarters in a row. It sees wages stagnate, retail sales drop and unemployment increase but seldom lasts longer than a year.

  • Depression is a much more serious economic slump in which all economic indicators take a beating for what could be several years at a time, such as the Great Depression of the 1930s and arguably the 2008 crash.

Examples of Hyperinflation

Hyperinflation is thankfully rare, as it’s a terrifying economic downturn that collapses nations. The most recent examples are Venezuela and Zimbabwe.

Venezuela saw prices rise by over 380,000% between 2013 and 2019. Over 4 million people fled the nation as economic refugees by 2019 after six years of downturn. The disaster began when the government mandated low prices on products in 2013, but companies couldn’t manufacture the goods for the prices dictated by the government and most shuttered, forcing the government to begin importing goods for consumers to purchase. Unfortunately, when oil prices collapsed in 2014, the country — among the world’s top oil producers — lost its main economic engine, and importing those goods became explosively expensive as its currency went into a freefall.

Between 2004 and 2009, Zimbabwe’s economy cratered as it printed money with abandon to pay for a war, causing an insane 98% inflation daily, and items literally doubled in price in just a day. Initially in 2004, it was stagflation that happened as the currency was printed, but once that train left the station, the inflation grew and the recession worsened and worsened until hyperinflation kicked in. Eventually, it stopped the bleeding by switching to the American dollar for its currency.

Examples of Stagflation

During the American recession between 1973 and 1975 under President Nixon, there was a perfect storm of world conditions and poor leadership choices that coincided to create a decade of difficult times in America because even though the recession was from 1973 to 1975, five years followed with attempts to try and end the persistent stagflation dogging the nation. The result of hiking interest rates to try to jolt the economy was the 1980 to 1982 recession.

The holy trinity of stagflation causes are:

  1. Wild swings in oil prices
  2. Government printing money to excess in a compressed period
  3. High tariffs and/or taxes coupled with heavy regulations imposed on businesses

These were all the factors that influenced America’s stagflation decade in the 1970s. All three were present in 2013 to 2014 in Venezuela and two were involved in the rise of Zimbabwe’s hyperinflation. Of those three nations, America is lucky that it was able to bounce back from the 1982 recession rather than plunging into an era of hyperinflation.

Wages vs. Inflation

The definition of "high inflation" depends on whom you’re asking. Sure, 2% to 5% a year is pretty standard and is a nice, healthy indicator for an economy. What if you’re an employee who hasn’t had a raise in five years? You’re earning the same dollar for dollar that you earned a half decade ago, but everything in your life has gone up 2% a year compounded, which means prices have risen more than 11% since your raise, but 5% inflation means a compounded increase of 28% over the same period.

Throw anything into that mix — like skyrocketing oil prices — and it’s a recipe for recession. For sustainable inflation, people’s spending power must increase as well. While governments may be able to spur lending and borrowing through interest rates, the only way they can control wages is to raise the minimum wage. Unfortunately, the minimum wage only affects the lowest earners in the nation, and the rest are all reliant on the good will of their employers and other market forces.

How Is Inflation Controlled?

There is a myth that inflation can be controlled, but it can’t. Governments of nations can try to spur the economy in a better direction by raising or lowering national bank lending and borrowing rates and by increasing or lowering tariffs and taxes.

It’s like baking a cake — sure, having a good batter is an important part in making a tasty cake, but it needs the right temperature in the right pan that has the right dimensions, and it needs the right icing too. There are so many factors that affect the cake and the economy, so it’s not good enough to just have the right ingredients. This is the same situation with government actions but even more so because governments make big mistakes by misjudging the economy.

A great example of that is when governments raise importation tariffs to try to protect domestic business because this means prices increase — a factor of inflation — and consumer confidence can begin to wobble, which is one of the indicators of a recession beginning, especially in America where the economy is 70% reliant on consumer spending.

As an example, consider the 2008 recession, when the government cut interest rates to increase consumer and business lending so people could access money for spending, building and creating jobs. As the recession dragged on and on, the rates remained low for a sustained period. However, as the economy began to strengthen, rates began rising again — something economists cheered while consumers cursed. Inflation, it turns out, is coveted by economists and governments as an economic driver.

Why Create Inflation?

After the economy crashed in 2008, banks cut interest rates and deflation happened, naturally lowering prices, all in an effort to increase consumer spending and spur economic growth. So, if low inflation rates increase spending, why do governments want inflation to increase? It's because it makes the government money, as the government gains from healthy inflation and technically even gains from a high rate of inflation. Why is this?

For starters, have you seen the size of government debt lately? As of 2019, the American government was in debt to the tune of $22 trillion. With an economy going through steady inflation, that debt is constantly being worth slightly less because the dollar’s value is slightly less as time goes on. Plus, as inflation raises the prices on goods, the government gets to pocket additional taxes since the overall price is higher and so is the tax.

Another upside to having years of successive inflation is that governments then have room to adjust interest rates to help temper the impact of a sudden downturn. Periodically, the economy will have been soft for so long that central/national banks will turn to negative interest rates so that depositors will have to pay to keep their money in banks as opposed to earning interest. This is to provoke spending so money doesn’t sit in banks while an economy needs to recover. Going negative is much less desirable than simply reducing interest, but that requires that an economy has had enough inflation in recent years that there’s some room for movement in the rates.