Cause of Inflation is a worldwide phenomenon, the rate of increase in the price of goods in a given period of time is known as inflation. Inflation is the after effect of change in demand and supply in an economy . We have all once heard about inflation once in our life but do we understand it? in this article, we will understand about it in the simplest way possible.
Causes of Inflation
There are so many ways in which price rise in an economy occurs we will read about Two main causes of inflation which are:
- Demand-Pull Inflation
- Supply-side Inflation
Demand-Pull Inflation, cause of inflation
It happens when the total demand increases more than the total supply in an economy, which means the demand increase to such a level that the supply chain can not contain it. You may be wondering how does the demand increases? The demand increases when money increases in the hand of people. In an economy which is known as liquidity increases in the market in terms of economics.
For Example:- In the harvesting season money in the hand of farmers increases adversely which result in an increase in the demand of goods. We know that supply of those goods is limited so here we can see that demand increases. but the supply remains constant which will ultimately increases the price of goods in the market. The solution to this kind of inflation is pretty simple we just have to take away the money from the hand of the people. In INDIA our RBI takes different measures to maintain inflation under 4-6%. like REPO, REVERSE REPO, etc. we will read about Repo and Reverse Repo in upcoming articles
Supply-Side Inflation, cause of inflation
It happens when the supply chain in an economy breaks which means demand remains constant. But for some reason, people are not getting the supply of goods. It generally happens in one-two or some sectors of the economy which is known as skew-inflation in economic terms. There may be several reasons which can affect the supply of goods. Which can be the collapse of transportation, strikes, etc.
For example : we assume that Maharastra is supplying milk to Haryana. Due to floods in Maharastra road transportation collapse & Haryana will not be able to get a supply of milk which will ultimately increase the price of milk in Haryana. Easily solved by the interference of govt.
The Good and Bad
Cause of Inflation
When a country grows it will bring investments and money into the market which will surely increase inflation. So we can say inflation is directly proportional to the growth of an economy. Developed countries do not care about inflation as much as developing countries care about it. Because developing countries have to invest money in the market which will increase inflation.
Inflation is good until it remains under 4%-6% when it decreases too much. It will bring recession when it increases too much it will bring Hyperinflation.
A recession happens when there is no demand in an economy. Because people may have no money to buy goods this will decrease the price of goods, so here we can see that the low price of a good may be bad for the economy. For Example: In the recent corona pandemic, the demand decreased which was an unannounced recession for the economy.
Hyperinflation happens when there is so much demand for so few goods. For Example: In Sri Lanka, the demand for petrol and gas is very high.
So we have learned about Cause of Inflatio and the good and bad of inflation.