Inflation is a measure of the rate of rising prices of goods and services in an economy. There are several possible causes of inflation, including:
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Demand-pull inflation: This occurs when there is too much demand relative to supply. For example, a surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
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Cost-push inflation: This occurs when prices rise because production costs increase, such as raw materials and wages. For instance, an increase in the costs of raw materials or labor can contribute to demand-pull inflation.
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Inflation expectations: In many models of inflation, the cause isn’t an increase in the money supply but an unanticipated increase in the money supply. The intuition is that if everyone knows demand will increase, then prices will rise, and inflation will occur.
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Supply shocks: Inflation often happens because of supply shocks — major disruptions to an important economic input, like energy. For example, if a lot of oil fields stop producing oil because of a war, the price of energy increases. Since energy is a critical input into almost every other good, prices of other things rise, too. This is often called “cost-push inflation” .
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Fiscal policy: Fiscal policy contributed to the inflation, but primarily through its effects on consumer demand for commodities and goods in limited supply rather than through the labor market.
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Monetary policy: Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the value of money falls, and prices rise.
These different causes of inflation are considered by central banks when they analyze and forecast inflation.
