What Causes Inflation? Drivers, Data, and How Traders Can Position

Overview

Inflation is a sustained rise in the general price level. It usually emerges from a mix of strong demand, constrained supply, easy money/credit, and rising inflation expectations. For traders, inflation shifts central-bank policy, real yields, and cross-asset correlations—moving crypto, gold, oil, bonds, and equities.

Key takeaways

• The big four: demand-pull, cost-push, money/credit growth, and expectations.
• Measurement matters: core vs headline (energy/food), shelter components, and trimmed-mean indexes.
• Watch real yields and breakevens: Nominal yield ≈ Real yield + Expected inflation (Fisher).
• Rising inflation tends to favor commodities (gold/oil) and short-duration assets; disinflation favors longer-duration growth and bonds. Crypto’s response depends on liquidity and real yields.

How inflation is measured

• CPI: Consumer Price Index (headline and core).
• PCE: Fed’s preferred gauge in the US (core PCE is stickier).
• PPI/Import Prices: Upstream cost pressures.
• Trimmed-mean/Median CPI: Noise-reduced measures of persistence.
• Breakeven inflation: Market-implied inflation from TIPS vs Treasuries.

The main causes of inflation (and what to track)

Demand-pull (too much money chasing too few goods)

• Causes: Fiscal stimulus, low rates, strong employment/wealth effects.
• Data to watch: Retail sales, services PMI, unemployment rate, consumer credit growth.
• Trading lens: Can lift risk assets initially; persistent overheating pressures bonds and long-duration tech.

Cost-push (rising input costs)

• Causes: Energy shocks (oil/gas), shipping bottlenecks, tariffs, rising wages, supply-chain disruptions.
• Data to watch: Oil and gas prices, Baltic Dry/Container rates, PPI, unit labor costs, import prices.
• Trading lens: Bullish commodities; squeezes margins in cost-sensitive sectors.

Money and credit conditions

• Causes: Rapid growth in money supply (M2), QE/liquidity injections, easy bank lending; velocity matters.
• Rule of thumb: %ΔM + %ΔV ≈ %ΔP + %ΔY (Quantity Theory). If money/velocity grow faster than real output, prices tend to rise.
• Data to watch: M2 YoY, bank lending standards, credit growth, financial conditions indices.
• Trading lens: Loose conditions can buoy crypto and high beta; tightening flips the script.

Inflation expectations and wage-price dynamics

• Causes: Households/firms expecting higher prices, bargaining for raises—can reinforce inflation.
• Data to watch: 1y/5y consumer expectations (UMich), 5y5y breakevens, Atlanta Fed Wage Tracker.
• Trading lens: Sticky expectations keep core services inflation high; boosts real-asset hedging demand (gold, RWAs).

Currency depreciation and import pass-through

• Causes: Weaker domestic currency raises import prices.
• Data to watch: DXY/NEER, import prices, current-account balances.
• Trading lens: EM FX weakness can fuel local inflation; bullish local-currency commodities, bearish long-duration bonds.

Structural factors

• Causes: Housing shortages, demographics, de-globalization, regulation, market concentration.
• Data to watch: Shelter CPI/OER, vacancy rates, building permits, trade restrictions.
• Trading lens: Shelter is sticky and often dominates core inflation prints.

Taxes and administered prices

• Causes: VAT hikes, fuel taxes, subsidy removals, utility price resets.
• Data to watch: Government policy calendars; regulated tariff announcements.
• Trading lens: Can spur short-term headline spikes without changing trend.

One-off shocks

• Causes: Wars, pandemics, natural disasters.
• Data to watch: Geopolitical risk indexes, commodity supply disruptions.
• Trading lens: Volatility and flight to quality (USD, gold); watch energy curves.

Case study: 2021–2023

• Demand: Reopening + fiscal transfers boosted consumption.
• Supply: Ports/shipping snarls; energy shock in 2022.
• Money/Credit: Rapid 2020–21 liquidity, then sharp tightening in 2022–23.
• Outcome: Headline CPI spiked, then fell as supply normalized and policy tightened; core/shelter lagged.

Trader’s checklist (next 3–6 months)

• Are breakevens rising while real yields fall? Pro-risk, supportive of gold/crypto.
• Is oil > key cost thresholds with low inventories? Persistent cost-push risk.
• Are wages outpacing productivity? Stickier core services inflation.
• Are financial conditions easing (credit spreads tighter, DXY weaker)? Inflation impulse can re-accelerate.

Playbook: positioning ideas (educational, not financial advice)

Rising inflation/rising breakevens:

• Overweight: commodities (oil, copper), gold, value/cash-flow equities, short-duration credit, selective RWAs.
• Rate-sensitive hedges: TIPS vs nominal Treasuries; steepener trades.
• Crypto: Bitcoin sometimes behaves like “digital gold” when real yields fall and liquidity is flush. Watch funding and real-yield trend.

Falling inflation/disinflation:

• Overweight: long-duration bonds, growth tech, quality factor.
• Crypto: Liquidity and real yields dominate—disinflation with dovish policy is typically supportive.

What doesn’t automatically cause inflation

• Money supply alone when velocity collapses (e.g., 2008–2013).
• Wage growth matched by productivity gains.
• “Greedflation” narratives without tight capacity or demand pull—markups can contribute but are rarely the sole driver.

FAQs

• Why do central banks hike rates against inflation? To cool demand and credit, lifting real yields and anchoring expectations.
• Why does “core” exclude food and energy? To strip volatile components and see the underlying trend.
• How fast do rate hikes affect inflation? With long and variable lags—often 6–18 months.