What causes "Inflation"?
This post will shed some light on the questions like: What is Inflation? What causes inflation?People usually complain about prices going up these days. This rise in prices in economic terms is called “inflation”.
Inflation:” Inflation is a rise in the general level of prices of goods and services in an economy over a period of time”.-Wikipedia
The higher the inflation, the lesser the value of our money. Inflation reduces the purchasing power of our money. Your money 5 years back cannot buy the same amount of goods now. We pay more money for the same quantity of goods.
Inflation is a sign that an economy is growing. The lack of inflation may be an indication that the economy is weakening.
Have you ever perhaps asked to anyone “What causes the inflation?”If you want to know then here’s a simple explanation:
There are many causes for inflation, depending on a number of factors. But there are broadly 3 causes:
Demand pull inflation: If demand is growing faster than supply, prices will increase. This usually occurs in growing economies like India. Prices are forced upwards because of the high demand.
Cost-push inflation: If there is drop in supply due to natural disaster (e.g. drought) or increased prices of inputs (raw material).
When a country experience natural disasters like excessive rain or drought, it destroys various crops, causing prices of these crops rise to high.
Let us say, if inputs/raw materials increase in price, this leads to the cost of production increasing. If there is a rise in production costs, which leads to an increase in the price of the final product of the company, which in turn leads to the company increasing prices to maintain their profits.
Built- in inflation: Rising labor costs can lead to inflation. As workers demand their wage increases, and companies usually chose to pass on those costs to their customers. It leads to a vicious circle.
There are various options available to fight inflation. Learn How to fight Inflation in my next post.