Causes of inflation

  

1) Demand-Pull Inflation

The output produced by the economy is insufficient to keep up with the pace of the current demand. Hence, there is a rise in the Aggregate Demand that is not matched with a similar increase in the productive capacity of the economy. This is known as the 'supply bottleneck'.

This can be attributed to the fact that there is simply too much money for too few goods. This could have happened because governments may have printed too much money to deal with a present crisis. According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation. Alternatively, there may be over-spending due to excessive optimism.

2)Cost-Push Inflation

This happens when the factors of production has increased resulting in a rise in the General Price Level even though the aggregate demand has remained constant. 

2a) Import-price Push Inflation

This type of inflation is caused when other countries face inflation. Hence, when purchasing their goods, the general prices seem to have risen. This will only affect the country severely if there are little to no substitutes of the goods available. However, if there are rampant alternatives, this would not affect the country purchasing the goods as much.

2b)Wage-Push Inflation

As costs of production have increased, importers will try to pass on some of the costs to domestic consumers. They do so by jacking up the prices of the goods they produce, resulting in a surge in the prices in local markets.

2c)Tax-Push Inflation

Inflation could have also been caused by the federal taxes put on consumer products. As the taxes rise, suppliers often pass on the burden to the consumer.

2d)Profit-Push Inflation

This occurs when certain suppliers monopolize the market. They are able to raise costs of their products without fearing a decrease in demand for their goods since they face few competitors. Consumers will still be forced to purchase the goods since they have no other choices to choose from. Hence, this is profit-driven and thus called profit-push.

2e)Negative Supply Shocks

These are caused by unexpected events that could drastically affect the supply of a particular good. Instances would include major earthquakes, tsunamis, or even oil spills.