Inflation occurs primarily due to an imbalance between the supply of money and the economy’s ability to produce goods and services. The main reasons inflation happens are:
- Demand-pull inflation : This happens when there is too much money chasing too few goods. If consumer demand rises faster than supply, prices go up because the economy cannot keep up with the demand.
- Cost-push inflation : This occurs when the costs of production inputs, such as raw materials or labor, increase. Producers then raise prices to cover these higher costs, leading to overall inflation.
- Inflation expectations : When consumers and businesses expect prices to rise, they adjust wages and prices accordingly, which can create a self-fulfilling cycle of inflation.
Other contributors can include supply shocks like natural disasters or geopolitical conflicts that disrupt production. Excessive government spending or excessive printing of money by central banks can also drive inflation if the money supply grows too much relative to the economy’s size.
