What is Inflation?
Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is anincrease in the average level of prices in Goods and services. Inflation happens whenthere are less Goods and more buyers, this will result in increase in the price of Goods,since there is more demand and less supply of the goods.
Inflation causes increase of Interest
Inflation can be recognized as a combination of 4 factors :
The Supply of money goes up
The Supply of Goods goes down
Demand for money goes down
Demand for goods goes up
Aggregate supply is the total volume of goods and services produced by an economy at agiven price level. When there is a decrease in the aggregate supply of goods and servicesstemming from an increase in the cost of production, we have cost-push inflation. Cost- push inflation basically means that prices have been “pushed up” by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) whencompanies are already running at full production capacity. With higher production costsand productivity maximized, companies cannot maintain profit margins by producing thesame amounts of goods and services. As a result, the increased costs are passed on toconsumers, causing a rise in the general price level (inflation).
, also called "supply shock inflation," is caused by a drop in aggregatesupply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs couldthen pass this on to consumers in the form of increased prices. Another example stemsfrom unexpectedly high Insured Losses, either legitimate (catastrophes) or fraudulent(which might be particularly prevalent in times of recession)
Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of themacroeconomy: households, businesses, governments andforeign buyers. When these four sectors concurrently want to purchase more output thanthe economy can produce, they compete to purchase limited amounts of goods andservices. Buyers in essence “bid prices up”, again, causing inflation. This excessivedemand, also referred to as “too much money chasing too few goods”, usually occurs inan expanding economy.