Causes of Inflation

Inflation has a deep impact on the livelihood of the people living in any nation as the prices of all basic necessities increase with inflation. The prices of certain commodities increase with time but whenever there is a huge increase in the prices of basic commodities within a lesser period of time then it can be said that the nation is under inflation. However, there is not always a single reason for inflation there can be multiple reasons behind it. Also, it always doesn’t come with a loss for everyone sometimes it also results in profits for many people.

What are the causes of Inflation?

1. Increased Consumer Spending: When consumers increase their spending significantly, it creates higher demand for goods and services. If production cannot keep up with this increased demand, prices tend to rise.
2. Rising Production Costs: If the cost of production for goods and services increases, businesses may pass these higher costs on to consumers in the form of higher prices. This can be due to factors such as increased wages, higher raw material costs, or increased energy prices.
3. Wage Price Spiral: This occurs when workers demand higher wages to keep up with the rising cost of living. When businesses accommodate these wage increases by raising prices, it can create a cycle where wages and prices continually rise.
4. Money Supply Growth: Inflation can be influenced by an increase in the money supply. If the supply of money grows faster than the supply of goods and services, it can lead to more money chasing fewer goods, resulting in higher prices.
5. Exchange Rates: Fluctuations in exchange rates can impact the prices of imported goods. A depreciation of the national currency may increase the cost of imported goods, contributing to inflation.

Major Causes of Inflation

A. Demand-Pull Inflation

The prices of certain goods and services rise as their demand gets increases. However, a huge demand for specific good services doesn’t cause an imbalance in the demand and supply. The demand and supply of any good or service can create a huge impact on the prices of that particular good. The prices of goods increase as the demand increases. For example whenever the supply of any good decreases the prices of that specific good begin to rise and in such conditions, people are forced to buy goods at higher prices. There are many other factors that contribute significantly to inflation like lower unemployment, higher cash flow, less repo rate, increased wages, etc.  

B. Cost-Push Inflation

The price of the finished product directly depends upon the cost involved in its production for example if the production cost is less then the price of the product will be less and vice versa. Thus this increases the prices of goods and services due to increases in the production cost can be referred to as the cost-push inflation and also it’s one of the main causes of inflation. The cost-push inflation mainly affects the prices of the goods and services whose price is driven by the raw material cost. Metal is one of the major raw materials for the industries as a result of an increase in the prices of oil and metal the prices of many finished goods increases as metal is the major raw material for numerous industries and oil fulfills the energy demand of almost all industries. 

Along with the raw material prices and production costs, employee wages also have a significant impact on the prices of finished goods. For example, if a company hires a skilled worker to manufacture a particular item, then the company pays him high for his skills and collects the same amount from the customer by charging them high for that specific product.

C. Economic Policies of the government

The economic policies of the government play a significant role in causing or controlling inflation. Inflation is mainly controlled by regulating the flow of money in the market which is done by the government. Thus the economic policies of the government can sometimes lead to inflation and can even help in controlling inflation. The government can regulate the level of inflation by regulating taxation, maintaining the repo rate, and introducing better economic policies that can help both the buyer and the seller.

As per the recent data the inflation rate in India in the first quarter has reached above 7.79%

Who Gets Profited from Inflation?

Not everyone suffers a loss due to inflation, there are many who get profited from it and mainly the investors and stakeholders. 

• Investors– Investors enjoy a great profit due to inflation as the price of their assets and investments multiplies with an increase in the rate of inflation. For example, for an investor who has bought some precious metal or a piece of land years back, at present its rate has been multiplied significantly.
• Share Holders– It’s a usual trend in the stock market that the prices of stocks go up with the time and thus as the rate of inflation increases the prices of the stocks also increase thus generating a decent profit for the shareholders. 
• Construction Companies– Construction and house building companies also enjoy a great profit with the inflation as they build the buildings as per the current rates but then sell them at higher prices after some years when the rate of inflation has been increased. 
• Wholesale suppliers and large distributors– It has been observed that the large distributors and the wholesale suppliers hold the supply to increase the prices of goods. So that they can higher profit by selling when the demand rises and supply shortfalls. 

FAQs on Causes of Inflation

1. What is demand-pull inflation, and how does it contribute to rising prices?

Demand-pull inflation occurs when the demand for goods and services exceeds their supply, leading to an increase in prices. Factors such as increased consumer spending, lower unemployment, and higher wages can contribute to demand-pull inflation by creating imbalances in supply and demand.

2. How does cost-push inflation impact the prices of goods and services?

Cost-push inflation results from increases in production costs, including raw material prices, energy costs, and employee wages. When these costs rise, businesses may pass them on to consumers, causing the prices of finished goods and services to increase. The article explains how cost-push inflation affects various industries dependent on raw materials and production costs.

3. What role do economic policies of the government play in causing or controlling inflation?

The economic policies of the government play a crucial role in influencing inflation. Government actions, such as regulating the flow of money, taxation, and controlling the repo rate, can impact inflation levels. The article highlights how government policies can either contribute to or help control inflation.

4. Who benefits from inflation, and why do investors, shareholders, and construction companies profit from it?

Despite the negative impact on the general population, inflation can benefit certain groups. Investors benefit as the value of their assets and investments tends to multiply with rising inflation. Shareholders in the stock market often see an increase in stock prices.

ayushp12312

Follow

Improve