Built in inflation is a cycle where rising wages and costs feed into higher prices, which then drive further wage and cost increases. It can affect everything from your daily expenses to your long-term investments. This article breaks down what built in inflation is, how it differs from other types of inflation, and seven practical steps you can take to help plan around its potential impact on your finances.
You likely already know that general inflation can affect your finances, but did you know that built in inflation is another significant factor in the way the economy works, and that it can directly affect your wallet?
Technically speaking, built in inflation results from an increase in money supply, which in turn leads to a decrease in your (the average citizen’s) purchasing power. There are several types of built in inflation, all of which have different effects on the economy and your daily life, which we will explore here.
What Is Built In Inflation?
Built in inflation, sometimes called wage-price inflation, refers to the cycle where rising prices lead workers to expect continued increases and negotiate higher wages, which can then push prices up further. Unlike inflation driven by sudden supply shocks or surges in demand, built in inflation tends to be self-reinforcing: it’s rooted in expectations about future costs rather than a single external trigger. Over time, this feedback loop between wages and prices can become embedded in the economy, making it one of the more persistent forms of inflation for governments to address.
In the simplest terms, this kind of inflation is the result of an increase in the money supply. Typically, this increase comes when the government or the Federal Reserve prints more money – and that directly causes inflation.
It can also be caused by an increase in taxes, as this has the same effect as taking money out of people’s pockets, which makes them less likely to spend.
When you have less money to spend, you are less likely to buy goods and services, meaning that businesses have to charge more for their products and services to make up for the loss in revenue. And so we see the very practical impact of built in inflation.
3 Types of Built In Inflation and Their Effects
Now that you know what built in inflation is in the most general sense, let’s drill down into its subtypes. There are 3 common types of built in inflation, each of which have their own effects on the economy.
The most common type of inflation is consumer price inflation. This occurs when prices increase for goods and services. When the cost of basic necessities goes up, you have less disposable income to spend on non-essential goods and services like dining out or purchasing a new vehicle. This effect of inflation could lead to a decrease in demand for goods and services, which can then lead to a decline in production.
The second type of built in inflation is asset price inflation, which is when the prices of assets such as stocks, bonds, and real estate increase. This can be caused by an increase in the money supply (as we mentioned earlier).
How does this type of inflation affect the economy? When asset prices increase, that often leads to an increase in debt because you are more likely to borrow money against the increased value of your assets.
Last is wage inflation, which, as you may surmise, is when wages increase. An increase in demand for labor can cause this type of inflation. While higher wages may seem beneficial at first, wage inflation can indirectly lead to an increase in prices. This happens because, when businesses have to pay more for labor, they pass the increased cost on to consumers like you, in the form of higher prices.
How Built In Inflation Affects the Economy
So now that you know what built in inflation is and what its three subtypes are, let’s turn our attention to the wider effects of this kind of inflation on the economy. Interestingly, built in inflation can have both positive and negative effects.
On the up side, it can stimulate increased production and availability of goods. This in turn can create more jobs, which then puts more money naturally back into the economy. On the down side, it could trigger a decrease in demand for goods and services, as you have less money to spend when prices are high.
How Built In Inflation Affects People's Daily Lives
While it’s all well and good to consider inflation in relation to the economy theoretically, you are probably wondering how it is likely to impact you practically.
Built in inflation can be particularly impactful because it’s self-reinforcing. Since workers expect prices to keep rising, they push for higher wages, which in turn encourages businesses to push prices higher, gradually eroding your purchasing power in a cycle that can be difficult to break.
This cycle can lead to an increase in your cost of living because you typically have to pay more for goods and services. In other words, it can lead to a decrease in your purchasing power when your wages do not keep up with the inflation rate (so you have less money to spend on goods and services).
7 Ways to Help Protect Yourself from the Effects of Inflation
You can do many things to help protect yourself from the adverse effects of built in inflation. Here are seven practical steps you can take to help move toward financial planning that accounts for this kind of inflation:
- Diversify your investments: Diversifying your investments means putting your money into a variety of investment types, including stocks, bonds, and real estate. It’s a literal walking out of “Don’t put all your eggs in one basket.” This is designed to help reduce the effects of inflation on your asset values because if one investment type – like your real estate holdings – is not doing well at the moment, other investments may still be holding steady or growing.
- Establish a savings account: Building personal savings can help you navigate the implications of inflation by allowing you to pay higher prices without taking money from one budget category to use for another. For example, if food and gas increase, you can use your savings to offset the added expense rather than taking money from the personal items allowance in your budget.
- Stay informed: Understanding current financial conditions could help you to be more aware of the different types of inflation and how they can affect the economy. Stay informed about topics such as the money supply, interest rates, and wages. Following sources such as the Financial Times or the Wall Street Journal can be a great start.
- Be prepared and plan ahead: You can be prepared by having an emergency fund, for example. This is money that you set aside for unexpected expenses, such as a job loss, car repairs, or medical bills. A general guideline for an emergency fund is to have 3 to 6 months worth of expenses set aside. Planning for the consequences of inflation may help you prepare for the effects it could have on your finances and lifestyle.
- Work with a financial advisor: A CFP® can help you create a plan that accounts for the likely consequences of inflation. A financial advisor can guide you to diversify your investments, save, and budget your money. You can call Iron Point Financial today or schedule an appointment with a CFP® to start planning for your future.
- Talk to an accountant: This could help you to understand how built in inflation can affect your taxes. An accountant can help you to minimize the impact of built in inflation on your taxes.
- Speak up: Speaking up means letting your elected leaders know what you think about the way inflation and the economy are being handled. Doing this means that you could be heard by policymakers and might make an impact on the decisions made around inflation. You can reach out to local government offices and participate in surveys about current topics to be involved.
How Built In Inflation Relates to Other Types of Inflation
Built in inflation isn’t the only type of inflation that affects the economy, but it behaves differently from the others. Understanding how these types compare can help clarify why prices rise and what that may mean for your financial decisions.
The main types of inflation include:
- Demand-pull inflation occurs when demand for goods and services outpaces supply. When consumers and businesses compete for limited products, prices tend to rise. This is often described as “too much money chasing too few goods.”
- Cost-push inflation happens when the cost of producing goods and services increases. Rising prices for raw materials, energy, or other inputs can force businesses to raise their prices, even when demand hasn’t changed.
- Built in inflation, sometimes called wage-price inflation, is driven by expectations. When workers anticipate rising prices, they may negotiate higher wages to keep up. Businesses facing higher labor costs may then raise prices to maintain their margins, which can reinforce the cycle.
Built in inflation shares common ground with cost-push inflation because both involve rising production costs. However, the driving force is different. Cost-push inflation is typically triggered by external factors like a spike in oil prices or supply chain disruptions. Built-in inflation is self-reinforcing: it’s fueled by the expectation that prices may keep climbing, creating a feedback loop between wages and prices.
While cost-push inflation has overlap with built in inflation, it’s also valuable to understand that these categories don’t operate in isolation. A sustained period of demand-pull inflation, for example, can set the stage for built-in inflation. If prices rise long enough, workers may begin to expect continued increases and push for higher wages, shifting the dynamic from demand-driven to expectation-driven. Similarly, cost-push pressures can feed into built-in inflation when businesses and workers adjust their expectations around sustained cost increases.
When built-in inflation takes hold, it can gradually erode your purchasing power, meaning everyday expenses may take up a larger share of your income over time. It can also influence interest rates, investment returns, and the broader economic environment in ways that may shape your long-term financial planning. Being aware of how different types of inflation interact can be a useful part of making informed decisions about saving, spending, and investing.
How Built In Inflation Could Shape Future Business Investment and Tax Policy
When businesses expect prices and wages to keep rising, it can change the way they plan for the future. A company deciding whether to expand, hire new employees, or invest in equipment may hold back if built in inflation makes costs feel unpredictable. That hesitation could ripple through the broader economy, potentially slowing growth in industries that rely on long-term planning, like manufacturing and real estate development.
Tax policy can also shift in response. As wages and prices climb, you might find yourself pushed into a higher tax bracket, even if your purchasing power hasn’t actually improved. This phenomenon, sometimes called “bracket creep,” means you could end up paying more in taxes without earning more in real terms. Policymakers may respond by adjusting tax brackets, modifying deductions, or introducing new incentives designed to offset inflation’s effects on households and businesses alike.
For you as an individual, understanding this connection matters. The investments in your portfolio, the growth trajectory of the company you work for, and even the tax strategies available to you may all look different depending on how built in inflation trends over the coming years. Staying informed and working with a financial professional can help you anticipate these shifts rather than react to them after the fact.
What Iron Point Financial Can Do For You
We know that following news on finances and the economy can be difficult or confusing. That’s why we’re here to help. Built in inflation doesn’t have to catch you off guard.
If you’re looking for a thoughtful, personalized approach to planning your financial future, the team at Iron Point Financial can help you explore your options and create a strategy that fits your life. Schedule an appointment today, or give us a call to start the conversation.
Or, if you don’t feel ready to talk to an adviser just yet, but you enjoyed this content, why not sign up for regular email updates from our blog, so that you don’t miss future posts?
Key Takeaways
- Built in inflation is a cycle where rising prices and rising wages feed off each other, making it one of the more persistent forms of inflation to manage.
- It can quietly erode your purchasing power over time, even if your income is technically growing, because wages often lag behind price increases.
- Asset prices, consumer prices, and wages are all affected differently, so understanding the type of inflation at play can help you make more informed financial decisions.
- Proactive steps like diversifying your investments, maintaining an emergency fund, and staying informed about economic trends can help you stay ahead of inflation’s effects.
- Working with a financial advisor can help you build a personalized plan that accounts for inflation’s impact on your specific goals, whether that’s retirement, saving for your family, or growing your wealth over time.
Further Reading
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
Disclosures:
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- All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
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Built In Inflation FAQs
What is built in inflation in simple terms?
Built in inflation is a self-reinforcing cycle where rising prices lead to higher wage demands, which in turn push prices even higher.
When workers experience a period of rising costs, they typically expect that trend will continue and negotiate for higher pay to keep up. Businesses then raise their prices to cover those increased labor costs, and the cycle repeats. Unlike a one-time price spike, built in inflation tends to persist until something, usually deliberate policy action, breaks the pattern.
What causes built in inflation?
Built in inflation is primarily caused by expectations. When people assume prices will keep rising, they tend to adjust their behavior in ways that make it happen.
Workers push for higher wages, landlords raise rents, and businesses mark up their goods and services, all based on the belief that costs could keep climbing. Over time, these individual decisions compound into a broad economic trend. It’s less about a single trigger and more about a collective shift in mindset that becomes self-fulfilling.
How is built in inflation different from demand-pull or cost-push inflation?
Built in inflation is driven by expectations and behavior, while demand-pull inflation comes from excess consumer spending and cost-push inflation comes from rising production costs.
Demand-pull inflation occurs when there’s more demand than the economy can supply. Cost-push inflation results from higher input costs, like energy or raw materials. Built in inflation is distinct because it’s rooted in the wage-price cycle: workers and businesses adjusting to what they expect could happen, regardless of current supply and demand conditions.
Can built in inflation be stopped?
It can be slowed, but breaking the cycle typically requires sustained monetary policy action and a shift in public expectations.
Central banks may raise interest rates to cool economic activity, which can help disrupt the wage-price cycle. However, this approach often comes with trade-offs like slower growth or higher unemployment in the short term. The hardest part is resetting expectations: until workers and businesses stop assuming prices will keep climbing, the cycle tends to continue.
How does built in inflation affect my savings and investments?
Built in inflation can erode the real value of cash savings over time, since each dollar buys less as prices rise.
If your money is sitting in a standard savings account earning minimal interest, inflation may outpace your returns. Investments like stocks, real estate, or inflation-protected securities may offer some buffer, but results vary depending on market conditions and your timeline. A diversified portfolio tailored to your specific goals could help you work to stay ahead of inflation’s gradual impact.
What can I do to help protect myself from built in inflation?
You can take proactive steps like diversifying your investments, building an emergency fund, staying informed, and working with a financial advisor.
Even small, consistent actions can make a meaningful difference. Reviewing your budget regularly, understanding how inflation affects your tax bracket, and having a plan for unexpected expenses all contribute to a stronger financial position. A financial professional can help you build a strategy that factors in inflation so you’re anticipating changes rather than reacting to them.
