Skandh Gupta | Updated: May 5, 2022 17:59 IST
The word inflation is quite in the news these days. Before talking about why inflation is so much in the news, let us understand its meaning. The meaning of the term inflation means there is a sustained increase in the price level. When the general price level goes up, every unit of a currency will buy fewer goods and services. This consequently results in inflation which leads to a decrease in the purchasing power of money. There are many factors which cause inflation. Today we will get to know about the same.
To give you a brief overview of the factors determining inflation, we have attached a table below.
| Factors which cause Inflation | Meaning |
| Demand-pull inflation | Aggregate demand growing faster than aggregate supply. |
| Cost-push inflation | An increase in the costs of firms is passed on to consumers. |
| Growing Economy | Employment is generated, and people get money in their pockets that they are willing to spend. This higher demand allows suppliers to increase prices, which in turn leads to more jobs, which puts more money in circulation, and it goes round and round. |
| Printing more money | If there is more money buying the same amount of goods, then prices will rise. |
| Expectations of inflation | High inflation expectations cause workers to demand wage increases and firms to push up prices. |
Now that we have got a brief idea of the factors which cause inflation, let us get into the details.
The factors leading to demand-pull inflation are
In the picture above, the aggregate demand is increasing which leads to a right shift. To match this level, price is also increased. This is one of the factors which cause Inflation.
If there is an increase in the costs of production by the firms, then the same will be passed on to consumers. This will lead to a shift to the left in the curve.
Cost-push inflation can be caused by many factors such as
Once a country witnesses inflation, it is difficult to reduce it. For example, higher prices of goods will cause workers to demand higher wages causing a wage-price spiral. Therefore, expectations of inflation are critical. If people foresee high inflation, it tends to be self-fulfilling. However, when expectations are low, temporary rises in prices tend to be short-lived and fade away. Also, higher wages lead to an increase in the price of goods thus leading to inflation. We have read the same above.
If the Central Bank of a country prints more money, it is expected to witness a rise in inflation. This is because the money supply plays a major role in determining prices. If there is more money buying the same amount of goods, then prices will rise. Hyperinflation, as in the case of the Weimar Republic, is usually caused by an extreme increase in the money supply. This is also one of the factors which cause Inflation.
In a growing or expanding economy, unemployment is low and wages usually rise. This leads to more people finding themselves with more money in their pocket, which they are willing to spend. This can be spent on luxuries as well as necessities. Anyway, this leads to higher demand which in turn allows suppliers to increase prices. This results in more jobs, which puts more money in circulation, and this cycle goes on until burst.
In this context, inflation is sometimes considered a positive thing. Indeed, the Central Bank of a country wants there to be inflation because it is a sign of a humming economy. But such institutions want only a little inflation and aim for a 2% annual core inflation rate. Many economists also consider this a healthy increase as long as it does not drastically outpace the growth of the economy as measured by gross domestic product (GDP).
Factors which cause Inflation can be of different varieties. But a little inflation is a good thing as it is the proof of an expanding economy. Hopefully, now you know the factors which cause Inflation. Read more such articles to ace the section of current affairs for your upcoming exams!
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The factors which cause Inflation are Demand-pull inflation, Cost-push inflation, Growing Economy, Printing more money, and Expectations of inflation.
Economists consider a little inflation healthy as long as it does not drastically outpace the growth of the economy as measured by gross domestic product (GDP).
When aggregate demand grows faster than aggregate supply it leads to inflation.
An increase in the costs of production of the company is passed on to consumers, which in turn increases the price and leads to inflation.
In a growing economy, employment is generated, and people get money in their pockets that they are willing to spend. This higher demand allows suppliers to increase prices, which in turn leads to more jobs, which puts more money in circulation, and it goes round and round.