INFLATION
Inflation is an economic phenomenon characterized by a general and sustained increase
in the overall price level of goods and services in an economy over a period of time,
resulting in a decrease in the purchasing power of a currency. In simpler terms, it means
that as inflation occurs, each unit of currency buys fewer goods and services.
CAUSES OF INFLATION
The causes of inflation can be broadly categorized into two main types:
Demand-Pull Inflation:
Demand-pull inflation occurs when the overall demand for goods and services in an
economy exceeds its supply. This can happen due to various factors:
Increased consumer spending: When consumers and households have more
disposable income, they tend to buy more, driving up demand.
Investment by businesses: Increased business investments and expansion can boost
demand for resources, increasing prices.
Government spending: If the government increases its spending on public projects,
it can stimulate demand and lead to inflation.
Exports: Strong demand for a country's exports can also lead to increased demand for
its currency, raising domestic prices.
Cost-Push Inflation:
Cost-push inflation is driven by rising production costs, which are then passed on to
consumers in the form of higher prices. Some key factors contributing to cost-push
inflation include:
Rising wages: When workers demand higher wages, businesses may increase prices to
cover increased labor costs.
Increase in the cost of raw materials: Prices of key inputs, such as oil, metals, and
agricultural products, can rise due to supply disruptions or geopolitical factors.
Supply chain disruptions: Events like natural disasters, conflicts, or pandemics can
disrupt supply chains, leading to shortages and higher production costs.
Taxes and regulations: Government policies like increased taxes or stricter
regulations can raise costs for businesses, which may pass them on to consumers.
Inflation is an economic phenomenon characterized by a general and sustained increase
in the overall price level of goods and services in an economy over a period of time,
resulting in a decrease in the purchasing power of a currency. In simpler terms, it means
that as inflation occurs, each unit of currency buys fewer goods and services.
CAUSES OF INFLATION
The causes of inflation can be broadly categorized into two main types:
Demand-Pull Inflation:
Demand-pull inflation occurs when the overall demand for goods and services in an
economy exceeds its supply. This can happen due to various factors:
Increased consumer spending: When consumers and households have more
disposable income, they tend to buy more, driving up demand.
Investment by businesses: Increased business investments and expansion can boost
demand for resources, increasing prices.
Government spending: If the government increases its spending on public projects,
it can stimulate demand and lead to inflation.
Exports: Strong demand for a country's exports can also lead to increased demand for
its currency, raising domestic prices.
Cost-Push Inflation:
Cost-push inflation is driven by rising production costs, which are then passed on to
consumers in the form of higher prices. Some key factors contributing to cost-push
inflation include:
Rising wages: When workers demand higher wages, businesses may increase prices to
cover increased labor costs.
Increase in the cost of raw materials: Prices of key inputs, such as oil, metals, and
agricultural products, can rise due to supply disruptions or geopolitical factors.
Supply chain disruptions: Events like natural disasters, conflicts, or pandemics can
disrupt supply chains, leading to shortages and higher production costs.
Taxes and regulations: Government policies like increased taxes or stricter
regulations can raise costs for businesses, which may pass them on to consumers.
