Inflation is caused by several key factors that influence the overall price level in an economy. These causes can be broadly grouped into three main categories: 1. Demand-pull inflation: This occurs when aggregate demand in the economy exceeds its productive capacity. When consumers and businesses want to buy more goods and services than the economy can produce, prices tend to rise. This can be driven by factors such as increased consumer spending, government expenditure, or monetary policies that boost demand, like lower interest rates
. 2. Cost-push inflation: This type of inflation arises from an increase in the costs of production inputs, such as raw materials, labor, and energy. When production becomes more expensive, businesses pass these costs onto consumers in the form of higher prices. Supply disruptions, natural disasters, or geopolitical events (e.g., war) can reduce supply or increase costs, leading to cost-push inflation
. 3. Inflation expectations: When households and businesses expect prices to rise in the future, they adjust their behavior accordingly-such as demanding higher wages or increasing prices preemptively. These expectations can become self-fulfilling, sustaining or accelerating inflation over time
. Additional factors influencing inflation include:
- Monetary policy: Excessive growth in the money supply relative to economic output can reduce the currency's purchasing power, leading to inflation. Central banks' policies, if too expansionary, can contribute to sustained inflation
- Supply shocks: Sudden disruptions in critical inputs like oil can cause widespread price increases across many sectors, fueling inflation
- Fiscal policies: Government tax cuts or increased spending can stimulate demand, potentially causing demand-pull inflation
Recent inflation episodes, such as those following the COVID-19 pandemic and geopolitical conflicts, have been influenced by a combination of these factors-higher demand from accumulated savings, supply chain disruptions, labor market changes, and increased costs of commodities like energy and food
. In summary, inflation results from a complex interplay of demand exceeding supply, rising production costs, monetary factors, and expectations about future prices
