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What are the causes of inflation?

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Tushar Chandra eNotes educator | Certified Educator

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The causes of inflation can broadly be divided into two classes: demand-pull inflation and cost-push inflation.

The former is due to an increase in the money supply in the economy. When people have an increased disposable income, they are willing to pay more for the same product. This allows producers to increase the cost of their products without making any other changes. The increase in money supply is done by the government to invigorate an economy which is moving towards a recessionary phase, something like what is being done around the world now. The government may also increase money supply by printing more money as they have no other way to acquire funds to buy what they require. An example of this could be Zimbabwe, where inflation has touched rates of over 1000% due to the government flooding the markets with more currency.

Cost-push inflation is caused due to a shortage of commodities that are required by people. Those who require them are therefore forced to pay a higher cost. An example of this could be an increase in the cost of petroleum products due to political unrest in the Middle East. This in turn leads to all other products in the economy also getting more expensive.

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thorsten1970 | Student

In economics, inflation distinguish the following reasons:
1. The growth of public expenditure to finance the State which resorts to printing money, increasing the money supply in excess of the needs of commodity circulation. It is most typically for military and crisis periods.
2. Surplus to expand the money supply through massive loans;
3. The monopoly of large firms to determine prices and their own production costs, especially in primary industries;
4. The monopoly of the trade unions, which limits the ability of the market mechanism to determine the acceptable level for the economy of wages;
5. Reduction of real national output, which is at a stable level of money supply leads to higher prices, since a smaller amount of goods and services are of the same number of money.

During a particularly severe inflation, as for example in Russia during the Civil War, and Germany of the 1920s. circulation can generally give way barter.

For advanced economies, the role of money in which fulfill the obligations that do not have their own value (fiatnye money), a slight inflation is considered normal and is typically a few percent per year. The inflation rate usually increases slightly at the end of the year, when increasing the level of consumption of goods by households and corporations, the level of expenditure.

gopikrishna | Student

Inflation is a sustained increase in the general price level leading to a fall in the purchasing power of money. The rate of inflation is measured by the annual percentage change in consumer prices.The main causes of inflation

• Inflation can come from both the demand and the supply-side and also from internal and external economic events.

• Some inflationary pressures direct from the domestic economy, for example the decisions of the utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets. A rise in the rate of VAT would also be a cause of increased inflation in the short term because it increases a firm’s production costs.

• Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.

• Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index.