Inflation: What it is and causes of inflation

Inflation has been recorded at different rates throughout history, depending on several factors, including population size, growth or decline of living standards, technology improvements, production costs, and resources available.

The causes of inflation are many. They range from changes in supply and demand conditions to cost-push factors like increased labor costs passed along by businesses to maintain profit margins. Below are the major causes of inflation.

Demand-pull effect

Inflation has a demand-pull effect when the buyers have sufficient resources to absorb the current supply of goods and services. However, as more people buy these products, demand will constantly escalate. As a result, a shortage in supply occurs due to limited availability or increased time needed for production, which drives up prices until it is profitable for producers to produce more.

Cost-push effect

Inflation can also be caused by increased costs in producing goods and services passed along the distribution pipeline. For example, a rise in wages demanded by workers will lead to higher production costs for a company. The company may pass this on to consumers through price hikes or absorb it by reducing profit margins.

In this case, inflation is caused by price levels rising due to increased costs for any of the factors of production, including labor, materials, and other inputs used in production.

The term ''cost-push'' refers to these factors pushing up prices as opposed to demand pulling them higher, as in the demand-pull effect.

Speculative effect

Increased speculative buying of goods may lead to price increases and inflation. Speculation can cause increased demand which cannot be met by existing supply, thus pushing up prices.

On the other hand, if producers don't anticipate future consumer demand for their products, they will not increase supply to meet it. This is called a ''supply shock'' which leads to the decrease of supply and subsequent increase in prices.

Currency devaluation

Inflation can also be caused by a devaluation of a nation's currency. If a country's money loses value, it takes more of its currency to buy the same amount of goods or services. This causes an increase in prices for products that are not traded globally, leading to inflation.

Other possible causes of inflation include:

Unanticipated Increase in Government Spending - The government's increased spending may cause higher market prices for goods and services as demand rises, leading to a higher price level.

Inflationary expectations - When people have high inflation expectations, they will demand higher wages, driving up prices.

Fiscal policy - An expansionary fiscal policy can lead to an increased money supply, which causes inflation.

Price Floors - A price floor is a government-imposed price control set below the market-clearing price. If it causes companies' costs to exceed revenue, they will need to increase their prices for products to remain profitable.

Increase in the Supply of Money - In a fractional reserve banking system, if the banks have more money to loan out than is held in reserves, inflation may occur. This happens when private individuals lend their own money or run a business on a short-term basis and withdraw from their checking accounts before they incur penalties for non-sufficient funds.

Conclusion

Inflation is the term used to describe a hike in the prices of goods and services over time. The causes of inflation are many, but the most common ones you should know about if you want to protect your money from losing value have been highlighted.

When these factors combine or act independently, they can increase the general price level (inflation), which means our currency will purchase less than before because their worth has gone down due to inflation. Therefore, use these causes when determining when your money is likely to lose its purchasing power so that you may take steps now