The Major causes of Inflation

MatthewA By MatthewA, 26th Nov 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/2tollivo/
Posted in Wikinut>Business>Investment

Inflation is a general increase in prices that is usually measured in annual percentage terms such 1%, 2%, 3% etc, which is the percentage increase. Inflationary trends can vary from country to country, and high inflation can reduce the value of currencies such as in Germany during the early 1920s when Germany had to introduce a new currency. Overall, there are a few contributory factors that can cause inflation.

Demand-Pull Inflation

Overall, general increases in demand are the main factor behind inflation. This is especially the case when supply is more limited or is reduced. As such, this is called demand-pull inflation. If demand exceeds supply then inflation will certainly increase. Even if demand does not exceed supply general increases in demand can still increase inflation.

There are a number of factors behind demand-pull inflation. Reductions in taxes and interest rates can be a factor behind demand-pull inflation. When interest rates are cut borrowing becomes a better alternative, as loans can be more easily repaid. In addition to this, reducing interest rates will reduce saving account interest as well.

As mentioned, tax cuts can also potentially increase inflation. Tax cuts can be for either direct tax or the more subtle indirect taxation. If direct tax is cut then real wages will increase. However, alternatively indirect tax cuts can make certain items more readily available.

Cost-Push Inflation

However, there are a number of other causes of inflation. An increase in business costs can also bring a general increase in inflation. This is called cost-push inflation.

Overall, production costs can increase for various reasons. Firstly, this can be because of an increase in import costs for raw materials. Or it can also be due to a general increase in labor outlays. In either case this will have an impact on business finances. As such, under such circumstances these increases in costs have to be balanced. Increasing prices is one of the best ways that this can be done.

A good example of cost-push inflation emerged during the 1970s. During this period a sharp increase in oil values, and decrease in oil exports from OPEC countries, ensured a general increase in production outlays during the 1970s. As such, inflation rates increased sharply during the 1970s alongside oil values.

As such, cost-push and demand-pull inflation are the main causes of inflation. Demand-pull inflation are those factors which can increase demand such as reducing interest rates and tax cuts. Cost-push inflation is when increased business outlays are passed on with price increases. Either can bring inflationary periods.

Tags

Inflation, Inflation Rate, Supply Demand

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author avatar MatthewA
Matthew is the author of the book Battles of the Pacific War 1941 - 1945. You can find further details at http://battlesofthepacificwar.blogspot.co.uk/.

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