Increase in private expenditure:
A continuous increase in consumption andinvestment expenditure in the private sector raises the demand for goods andservices and leads to inflationary rise in prices.
Increase in population:
The rapid rising population exerts pressure on thedemand for goods and services. If the supply of goods and services fail to matchwith the demand, the general price level moves upward.
The money generated through smuggling, tax evasion etc. raisesthe demand for luxury and other goods. Hence black money is also one of thecauses in raising the aggregate demand for goods and a rise in general price level.
Factors causing decrease in supply of goods:
If the increase in aggregatedemand for goods and services is matched by an increase in the supply of goods, itwill not cause inflationary situation. When the aggregate supply of goods is at aslower pace than the growth in aggregate demand, it then causes inflationary rise inprices. The following factors are identified for relatively slower growth in the supply of goods.
Lagging agricultural & industrial production:
The increase in population,incomes, employment and urbanization exert pressure on the demand for goods andservices. However, the agricultural and industrial production grows at a slower pace,due to shortage of essential inputs like fertilizers, water, cement, iron etc. Whenaggregate demand for goods and services exceeds the aggregate supply of it, itcauses a rise in the prices of agricultural and industrial goods.
(ii) Inadequate infrastructure facilities:
If, in a country there is shortage of power,transport and communication facilities are slow and inefficient, it results in theslowing down of overall production of goods. When the supply of goods falls short of demand, the prices go up in the country.
(iii) Long gestation period:
If the time lag between investment and the productionof goods is long, the shortage of goods will arise. This will also contribute toinflationary pressure in the economy.
B. Cost Push Inflation:
Cost push inflation occurs when there is an increase in the cost of productionof goods and is not associated with excess demand. The main causes of cost pushinflation are:
(1) Increase in money wage rate:
The wage push inflation occurs when stronglabour unions manage to press for wage increases in excess of labour productivity.Unit cost of production is thereby raised. The rise in cost of production exertspressure on sellers to increase prices of goods so as to get profit margin.
(2) Profit push inflation:
If the producers of certain commodities have monopoly or near monopoly power in the market, they fix up higher profit margins arbitrarilywithout any increase in other elements of cost. When a few powerful firms increasethe profit margins, the smaller firms also tend to mark up their profit margins. Thehigher profit margins, thus, inflate the price level.