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Name :

Instructor :

Topic : Causes of Inflation

Date : 15th April, 2021.

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Introduction

Inflation is defined as the measure of rise in prices of goods and services within an

economy. Inflation occurs when the cost of living and other services and goods increase within a

normally working economy and it disturbs the whole economy. Inflation is understood in terms

of changes in the supply-demand model of economy; hence the causes of inflation need to be

looked for in the two sides of this model. The causes of inflation are generally the changes in the

supply-demand interactions within an economy. The causes associated with each end of the

bipolar economic structure (supply and demand) affect and trigger each other.

Causes/Effects

The most common cause of inflation is understood in terms of the changes in demand

within a an economy which is close to or at full employment. This type of inflation is termed as

“Demand-pull inflation”. If an economy has full employment rate, then the wages are steady and

employees have a considerable spending power, which leads to an increased demand for

products. This increased demand leads to a rise in prices for specific products and the end-result

is inflation. It is important to note that that within the demand-pull paradigm, the cause of

inflation is not the increased demand, but the rising wages and full employment.

The second most significant cause of inflation is the increase in costs for firms. The type

of inflation caused by this change in the economic structure is known as the “Cost-push

inflation”. The increase in costs is further caused by numerous factors that include: rising wages.

Increase in raw material prices, increase in import prices. Whenever, any of these changes takes
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place, the cost of manufacturing and distribution increases for the firms, which is balanced by an

increase in the prices of goods or products i.e. inflation.

The most conspicuous cause of inflation is the printing of more money that is required

within an economy. The most complicated form of inflation is caused by the printing of extra

currency, which apparently seems to be non-problematic, but it has a tremendous impact on

prices. However, printing more money is not a simple phenomenon, as it leads to an excess of

money chasing few goods. By simple economic rules, if the goods are fewer and the money is in

excess, the economic balance is disturbed and currency loses its value, which in other words

means that prices increase and that is what we call inflation. It is important to know what causes

excess of currency printing as it does not occur on its own. The primary cause of printing extra

currency is budget deficit which can be defined as “ more expenditures and less income on

macro level”.

Conclusion

Inflation is caused by different aspects of an economic structure, which depends on all its

constituent parts equally. Most of the formal economies work on the basis of supply-demand

model and any changes in this model disturbs the whole economic activity and leads to an

increase in prices. In order to keep inflation from rising, the supply=demand balance needs to be

maintained strictly with room for small fluctuations, so that the balance is not disturbed.