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pohnpei397 eNotes educator| Certified Educator

There are two major causes of inflation.

One is called "demand-pull" inflation.  This is inflation caused when there is more demand than supply.  This can happen, for example, if the government prints too much money.  In this case, people have lots of money and can pay higher prices for goods.  So, in this case, the cause is an excess of money.

The other is called "cost-push" inflation.  This is caused by a drop in supply without an accompanying drop in demand.  If supply drops, the price of goods goes up because there are fewer goods to be had and people bid up the prices of those goods.  A common cause of this is a shortage of some vital good.  These days it is usually oil.  If there is not enough oil and oil prices go up, supply goes down and inflation occurs.

william1941 | Student

In addition to the inflation caused due to mismatch in supply and demand due to natural causes, another reason for inflation is the excess printing of currency by the central banks.

For a government to run its operations, stick to the commitments it has made, take care of social needs and continue operations of state run industries, the government needs to pay the people it employs, and for what it has to buy. Usually this amount is arranged through the taxes that are collected from people. But if the taxes fall short of what the government needs, it can use another method, which is that of printing money. As the supply of money is under the government's control the money it prints is used to finance its operations. But excessive printing of money leads to inflation. In a majority of nations inflation due to this reason exceeds inflation due to supply-demand mismatch.