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Causes of Inflation

Demand pull inflation

One of the basis causes of inflation is the rise in the aggregate demand. When demand rises it cannot be met by a corresponding increase in supply, the general price level will increase and inflation will occur.

Cost push inflation

The rise in general price level due to an increase in the cost of production. When any of the factors of production becomes costlier, it results in higher cost of production.  Cost of production may rise due to an increase in the wage rates or expensive raw materials. This reduces the profit margin of the producers. In order to maintain their profit margins, the producers increase the selling price of the commodity which results in cost push inflation.

Monetarist view of inflation

Some economists argue that inflation is caused due to an increase in supply of money in the economy. The idea is that too much money in the economy is chasing too few goods and thus inflation occurs.

Imported Inflation

This is very common for countries which are excessively dependent on imported goods. An increase in the prices of imported goods will lead to a rise in general price level in the economy. In this case the exchange rate plays a vital role. If the currency of a country depreciates it will lead to inflation as imports will become costlier.

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