What causes inflation?
Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic development as long as the annual percentage remains low; once the percentage rises over a pre-determined level, it is considered an inflation crisis. There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand. Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As workers d
It’s all a matter of supply and demand. When people have plenty of money they want to spend it to acquire goods and services. This makes a demand on those goods and services more than the averegae ‘need’. Imagine, for example, that a store has a supply of 100 computers for sale. The price is set at ‘what the market will stand’ or, in other words, what a willing buyer would be prepared to or is able to pay. If the price was $500 (£250) but only 80 people wanted to buy them then the price would be classed as too high since 20 remain unsold. The price would thus have to be dropped to encourage other buyers and when new stocks arrived the price would be adjusted accordingly to, say $450 (£225). If all 100 sold at the original price then the price is right. However if people had lots of spare cash and the demand was higher than the supply, say 120 people wanted 100 computers, then the store could increase the price to take advantage of the demand and bring the ratio back to 100 people getti
The most common cause of inflation is too much money chasing too few goods. If everybody had 5 times as much money but the amount of goods and services produced remained the same, prices would naturally rise by a factor of 5. So the answer to avoiding inflation is simply to avoid printing too much money. Easier said than done. Government leaders like to spend a lot of money on military equipment, roads, subsidies, building projects, etc., because this keeps them popular with their constituents. But getting money to pay for these things is often difficult. Raising taxes is as unpopular as government spending is popular. One alternative is to borrow the money, but sooner or later you have to pay it back. Probably the easiest way to pay for those popular government spending programs is to “print” some more money. As we saw in chapter 10, in most countries the money supplied is controlled by a central bank. In the United States, Japan, Switzerland, and Europe the central banks are independ
Key Economic Concepts: • Demand • Incentive • Inflation • Markets • Price • Supply Description: This lesson explores different types of inflation and terms associated with this economic concept. You may have heard relatives talk about the good old days when a dollar would buy something. What happened to that dollar? Why won’t it buy as much as it did last month or last year? What happened is inflation. In this lesson you will examine the various causes and theories of inflation as well as how it affects different groups in the economy such as savers, lender, and people living on fixed incomes.
