ARTICLE: Theoretical Approach to Knowing the Causes of Inflation

WHAT IS INFLATION?

Inflation is a situation of the economy where there is a rise in the prices of the commodities for long-term, and the main reason is the devaluation of the currency. It is a common problem faced by all the economies, but the main sufferers are due to the unmatched situations of the income of the people and the prices prevalent in the economy. It affects negatively because the income of the people does not always rise with the rise in the prices. Thus, the economy becomes a stagnant economy, or we can say a slow economy.

In this article, we will discuss the cause of inflation with the different types of inflation situation in the market. And additionally, it can also be a reason of unemployment in the economy, know 9 different types of unemployment in the economy in this article.

Causes of inflation

Inflation can be due to the internal and external factors affecting the economy.

  • The internal decisions of the economy also affect the inflationary conditions such as the prices of water or electricity, or even the LPG gas prices are decided due to the domestic conditions in the economy. Thus, when they decide to charge high prices, they can charge the prices with the minimal increase in the prices.
  • The increase in the value-added taxes also make the inflation rate to go higher, but it is for short term due to increase in the cost of production of the manufacturing units or the firms. The increase in the taxes can be due to various reasons. But this increase cost the prices to rise high.
  • The external factors also affect inflation such as a rise in the prices of crude oil and other things that are imported from other countries. The resellers have to pay the excise duties, and they have to charge the prices further with the hike and the customers are bound to take those prices.
  • The changes or the fluctuations in the exchange rate also affect inflation. For instance, if there is a change in the prices of dollars or pounds, then it also causes inflation due to high import prices. If we have to exchange the currency, we will get the raised prices, and that will affect a high rate of inflation.
  • Increase in supply of money can also cause the inflation to rise as it forces to pay more for every transaction which makes to incur the high cost of exchange rates and thus causing inflation.
  • The confidence of the consumer also makes the prices to rise to a higher level. It is the situation when the employment level is high, and wages are stable, the consumers become more confident and spend more on the goods or services. Thus, the rate of inflation is high in the economy.
  • The changes in demand and supply also cause the inflation to rise. When the supply falls in the market, then there is a rise in the prices as the demand would remain the same, but the supply would be less as per the demand. It will cause the prices to rise.
  • There are certain situations, where inflation is due to the automatic process but sometimes, it is caused intentionally by the business corporates. Companies that are in the manufacturing of the products can decide the prices as per their profit and cost of production, and the wholesales and the retailers are forced to take that prices.
  • Monopoly is the market situation where the seller is the price maker, and the people are price takers. The monopolist set the products as per their own expense and manufacturing cost. Thu, the people are forced to buy those prices in the market.

Types of inflation:

There are two types of inflation in the market:

  1. Demand-pull inflation
  2. Cost-push inflation

DEMAND-PULL INFLATION

It is the situation when there is a rise in aggregate demand, and the resources are scarce, the manufacturers have right to raise the prices to enjoy huge margins of profit.

Causes of demand-pull inflation:

  • The decrease in the rate of exchange makes the prices of imports to rise, and it reduces the export prices of the country.
  • The reduction in the direct taxes, will increase the consumption of disposable income and due to which demand increases.
  • The decrease in the rate of interests makes the demand to rise. Consequently, the government will have no control over the inflation and the money supply will expand at a faster rate.
  • The rise in the exports all over the world and can also make the flow of income to rise and due to which there is a rise in the demand-pull inflation.

COST-PUSH INFLATION

  • The situation of cost-push inflation arises when the firms start responding to the increase in prices so that they can save their profit margins in the sale of the products.

Causes of cost-push inflation:

  • The rise in the prices of raw materials also influences the cost-push inflation. It can be due to the increase in the prices of the products that are used in processing. These products can be oil copper or other agricultural products.
  • The increase in the wages of the labour also makes the economy to go through cost-push inflation. This situation arises due to the low unemployment rate because there is a need for more skilled workers as there are less of them. There is the only option of increasing the wage rates to the rates demanded by the labourers.
  • It is also due to the expectations of people from the inflation rate. People when seeing the rise in prices, they have concerns about their standards of living.
  • Due to high indirect taxes on the products like alcohol or cigarettes, there is a rise in cost-push inflation.
  • The decrease in the rate of exchange can also make the rise in cost-push inflation due to increase in the prices of imported goods, for instance, raw materials and other finished products.