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12 Causes of Inflation: Definition and Research

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12 Causes of Inflation: Definition and Research

The phrase "inflation" is one that we hear a lot. Cost-push inflation, repressed inflation, open inflation, supply-side inflation, demand-pull inflation, hyperinflation, and other types of inflation exist.

There could be a variety of factors for the economy's reoccurring inflation. Inflation is caused by a variety of factors, including increased government spending, stockpiling, price increases in internationally significant markets, tax reductions, and hoarding. 

As a result of these variables, prices are rising. Inflation could also be caused by rising demand. This essay will go over the definition of inflation and what causes it in great depth.

What is the Definition of Inflation?

Inflation is defined by most classical writers as a scenario in which there is too much money but not enough services and goods. The Consumer Price Index (CPI) is a method of calculating inflation.

The relationship between GDP and money supply is frequently unbalanced. Inflation can be classified into two broad categories:

Open inflation happens when the price level within the economy continues to rise.

Repressed inflation occurs when the economy has overall inflation but there is no increase in the prices of goods and services.

Inflation occurs when the aggregate supply and demand for services and goods are out of balance. As a result, anytime aggregate demand exceeds aggregate supply, prices continue to rise.

12 Inflationary Factors Investigated

12 Causes of Inflation: Definition and Research

Inflation can be caused by a number of factors. We'll go over a few of them here.

1. The root causes

The rise in inflation in the economy can be attributed to two main factors. When there is an excess of demand overstock, the price rises as a result of the higher demand. When the cost of manufacturing grows in tandem with the cost of factors, the cost of production rises as well. Another factor for the rise in prices in the economy is this.

2. An increase in the amount of money spent by the government

The amount of money spent by the government on public purposes such as building roads, providing government services, and so on is known as public expenditure. A growth in government spending frequently increases the amount of money in people's hands.

An rise in people's money leads to an increase in demand. Inflation happens when there is an excess of demand over supply. It is especially common in underdeveloped countries that require a lot of government assistance.

3. Government spending and deficit financing

The government's revenue sometimes falls short of its expenses. As a result, there is inequity in the economy. To compensate for this imbalance, the government frequently prints more money, a practice called as deficit financing.

As a result, the economy's inflation rate has risen. It's especially common because, as the amount of money in circulation rises, the total amount of commodities accessible in the economy remains constant.

4. Increased circulation velocity

The government's money supply, as well as the amount of money in circulation, determine how much money is used in the economy.

Inflation occurs when people in the economy spend money at a quicker rate than they earn it. This enhances the speed with which money circulates in the economy.

5. Compulsive hoarding

Hoarding of money could also be a factor in inflation. People, particularly salespeople, have a tendency to hoard available commodities rather than selling them. As a result of the stockpiling, there is a shortage of supplies, which drives up commodity market prices.

6. Genuine scarcity

There could be a reduction in output. The number of goods in the economy may decrease. Despite the fact that demand remains constant, if not increasing over time, supply remains scarce. Inflation is the result of a true scarcity in the economy.

7. Exports

For a stable economy, both internal and external demands must be addressed. To put it another way, the quantity needed by other economies must be met as well. When exports are in low supply, the money supply in the economy shrinks. Inflation is the effect of this.

8. Labor unions

Trade unions are sometimes the source of economic inflation. The job of trade unions is to demand that employees' pay be increased. If this is accomplished, the amount of money in the hands of people rises, but the cost of manufacturing rises as well. Both of these factors contribute to growing inflation.

9. Tax savings

Reduced taxes have two effects: first, they increase the amount of money in people's hands; second, they result in less money in the government's hands.

As a result, production decreases. Excess demand oversupply occurs when production falls and the amount of money in people's hands rises. As a result, the economy experiences inflation.

10. Indirect taxes

Businesses are subject to indirect taxes imposed by the government. VAT, excise duty, and other taxes are examples of different types of taxes.

The cost of production rises as a result of these indirect taxes. On their sales, the producers do not make enough money. As a result, people's money is depleted, resulting in inflation.

11. Price increases in international markets

Many things in an economy are manufactured using commodities imported from other countries. If the price of goods rises elsewhere, the cost of importation rises as well. When import costs rise, one of two things happens: either the goods will not be imported, or there will be a product shortage inside the economy.

It's also possible that the cost of production will rise. Both of these factors result in price increases and inflation.

12. Causes that aren't related to the economy

Inflation can be caused by a variety of non-economic factors. For example, some natural phenomena may cause a product shortage in the economy.

A flood could occur, destroying crops for a period of time. Rainfall could be disrupted, making it impossible to manufacture some food products. All of these are non-economic factors that lead to a reduction in supply and an increase in prices, resulting in inflation.

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