What are causes for inflation ?
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Answer Posted / sonali gawde
Demand-pull inflation refers to the idea that the economy
actual demands more goods and services than available.
This shortage of supply enables sellers to raise prices
until an equilibrium is put in place between supply and
demand.
The cost-push theory , also known as "supply shock
inflation", suggests that shortages or shocks to the
available supply of a certain good or product will cause a
ripple effect through the economy by raising prices through
the supply chain from the producer to the consumer. You
can readily see this in oil markets. When OPEC reduces oil
supply, prices are artificially driven up and result in
higher prices at the pump.
Money supply plays a large role in inflationary pressure as
well. Monetarist economists believe that if the Federal
Reserve does not control the money supply adequately, it
may actually grow at a rate faster than that of the
potential output in the economy, or real GDP. The belief
is that this will drive up prices and hence, inflation.
Low interest rates correspond with a high levels of money
supply and allow for more investment in big business and
new ideas which eventually leads to unsustainable levels of
inflation as cheap money is available. The credit crisis
of 2007 is a very good example of this at work.
Inflation can artificially be created through a circular
increase in wage earners demands and then the subsequent
increase in producer costs which will drive up the prices
of their goods and services. This will then translate back
into higher prices for the wage earners or consumers. As
demands go higher from each side, inflation will continue
to rise.
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