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The “Great Inflation” doesn’t happen all at once; it moves like a thermal wave through different layers of the economy. This process can be categorized into four distinct phases.

Phase I: The Injection (Monetary & Fiscal Origins)

Inflation usually begins with an imbalance between the supply of money and the supply of goods.

• Excess Liquidity: Central banks lower interest rates or engage in Quantitative Easing (QE), flooding the banking system with cheap credit.
• Fiscal Expansion: Governments increase spending (stimulus checks or infrastructure), directly boosting aggregate demand.
• External Shocks: A sudden increase in the price of global commodities (e.g., a surge in Brent\ Crude\ Oil prices) acts as an “imported” inflationary spark.

Phase II: The Upstream Surge (PPI & Production)

Before the consumer feels the heat, the industrial sector begins to “boil.”

• Input Cost Inflation: Manufacturers face rising costs for electricity, raw materials, and logistics.
• The PPI Spike: The Producer Price Index (PPI) reflects these rising costs. At this stage, corporate profit margins are often “squeezed” because companies are hesitant to scare off customers by raising prices immediately.
• Supply Chain Bottlenecks: If components (like semiconductors) are scarce, the “cost of waiting” adds a premium to the final production cost.

Phase III: The Pass-Through (CPI & Retail)

Eventually, businesses can no longer absorb the costs. They begin the Pass-Through Effect.

• The CPI Explosion: The Consumer Price Index (CPI) rises as retail prices for groceries, electronics, and vehicles are hiked.
• Service Sector Lag: Prices for services (haircuts, insurance, tuition) usually follow goods, as they are less dependent on raw materials but more sensitive to labor costs.
• Real Income Erosion: As prices outpace nominal wage growth, the purchasing power of the average household begins to decline.

Phase IV: The Institutionalization (The Feedback Loop)

This is the stage where inflation becomes “sticky” and difficult for central banks to control.

• Inflation Expectations: If consumers believe prices will rise by 5\% next year, they buy now rather than later, which ironically causes the 5\% increase to happen.
• The Wage-Price Spiral: This is the “deadly” loop. Workers demand higher nominal wages to maintain their standard of living. Employers grant these raises but then increase product prices to maintain their margins, creating a self-reinforcing cycle.

Summary Table: The Inflation Pipeline

Stage	Level	Primary Indicators	Key Characteristics
Stage 1	Monetary	M2 Money Supply, Fed Funds Rate	Increased “Dry Powder” in the economy.
Stage 2	Upstream	PPI, CRB Index (Commodities)	Raw material and energy costs skyrocket.
Stage 3	Downstream	CPI, PCE (Personal Consumption)	Consumer goods and rent become expensive.
Stage 4	Structural	Core CPI, Average Hourly Earnings	Inflation is “baked into” the system.

The Role of Central Banks

To break this path, central banks typically use Monetary Tightening (raising interest rates). This increases the cost of borrowing, cools down demand, and ideally “anchors” inflation expectations before the Wage-Price Spiral gets out of hand.