Reasons for Inflation


There are 4 main factors leading to inflation in an economy:

a. Demand-Pull Inflation

Demand-pull inflation arises when aggregate demand outpaces aggregate supply of goods and services. This kind of inflation is usually observed in periods when the economy is in a recovery trend and the unemployment rates are falling.

b. Cost-Push Inflation

Cost-push inflation occurs due to hikes in production costs arising from increases in the prices of commodities such as oil and food, or natural disasters. In such cases, aggregate supply decreases and consequently the general level of prices increases.

c. Money Supply

An increase in the money supply is another factor of inflation. In such cases, investment and consumption expenditures increase, exerting an upward pressure on prices.

d. Inflation Expectations

Consumers’ and producers’ expectations of a persistent increase in prices in the future constitute another factor of inflation. Such expectations lead to a hike in the prices of goods and services through wage demands.