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⇨ Causes of Inflation:
⇨ There can be two sets of factors that can cause inflation in an economy, They are:
⇨ Demand-Pull Factors:
⇨ Demand-pull inflation arises when the total demand for goods and services (i.e. ‘aggregate demand’) increases to exceed the supply of goods and services (i.e. ‘aggregate supply’) that can be sustainably produced.
⇨ The excess demand puts upward pressure on prices across a broad range of goods and services and ultimately leads to an increase in inflation.
⇨ The demand-pull inflation, or the increase in aggregate demand, is categorized by the four sections of the macroeconomy: households, businesses, governments, and foreign buyers.
⇨ Demand-pull inflation can be caused by an expanding economy, increased government spending, or overseas growth.
⇨ A few Demand-Pull Factors are a Rise in income and wages, a Rise in population, Increasing government expenditure, Black money, Increasing money supply (liberal monetary/fiscal policy), a Rise in income, a Parallel economy, and Excessive government expenditure.
⇨ Cost-Push Factors:
⇨ Cost-push inflation occurs when the total supply of goods and services in the economy which can be produced (aggregate supply) falls.
⇨ Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
⇨ An increase in the costs of raw materials or labor can contribute to cost-push inflation.
⇨ Cost-push inflation means prices have been "pushed up" by increases in the costs of any of the four factors of production—labor, capital, land, or entrepreneurship
⇨ A few Cost-Push Factors are Infrastructure bottlenecks which lead rise in production and distribution costs, Infrastructural surcharges, a Rise in Minimum Support Prices (MSP), an increase in prices of raw materials, a Rise in international prices, Hoarding & black marketing, Rise in imported inputs, and Rise in indirect taxes.
