Ah. Ok. My take on the compounding mechanism as it is applied to an investment that has a yield (interest) in that there is usually a set period of time (often 12 months) where the investor gets a return at a fixed rate. At the end of the term there is a payout. The compounding mechanism is triggered when the investor folds the interest back into the original principal and goes for a second round. Often there is an adjustment made to the rate of return but the key factor is that interest is now being earned on a larger principal. This means that the second term yield will be a larger amount than the first term yield. Do this again for round three and then four etc and you see the “compounding” mechanism in action. The longer you fold the yields back into the principal the more dramatic the compounding effect.

When it comes to inflation, I don’t currently see a parallel mechanism. I see a variety of “market forces” at work such as demand and cost pressures, monetary policies, wage and productivity factors, currency fluctuations and global conditions. Non of these to my knowledge have a structural mechanism which when applied to said “force” creates a feedback loop of growth or accumulation. All of these work together for sure to create the conditions for an inflationary ebb and flow, but nothing uses the compounding mechanism which can be applied to interest. Maybe someone can correct this if wrong! Cheers.