Reasons of inflation

Reasons of inflation

Situation of rising prices is known as inflation, and factor influences such rise are known as causes of inflation. There are number of causes for inflation in economy.

1.    Population is Rise

Population rate in the country may be a reason for inflation. It means that many people are chasing limited goods.   Country economy is not growing with the same pace as population. Such population can be controlled by reducing population growth.

2.    Money Supply

Money supply in the country plays a key role in increase of inflation. In old days this was regarded as only reason for inflation. Government monetary policy tool to control the money supply in the country. Contractionary policy is used to control the inflation in the country.

3.    Supply Shortages

Supply shortages may be a reason for inflation in the country. Sometimes producer use this tool (shortage of supply) to increase the price for profit maximization.  However, there may be real shortage of supply. There are number of reason for shortage of supply i.e. increases demand, natural disaster, and rise in cost of production.

4.    Increase in Production Cost

Prices will rise due to increase in production cost in the country. For example if the wage rate is increase due to demand of trade union, then prices of goods will follow this increase. Producer will increase the price to secure the desired profit levels. This type of inflation is known as cost push inflation.

5.    High Public Expenditure

High public expenditure will also create a lot of demand in the country, and supply may not be available to meet this demand, therefore expansionary fiscal policy (high public expenditure) will create a pressure on prices.

6.    Increase in Disposal income

Increase in income level of the people will also increase consumption & investment in the country. Therefore increase prices of factor of production may also results in inflation. It is important to note that increase income will effect inflation in two way cost push inflation & demand pull inflation.

7.    Black Money

Black money may be a reason for high inflation rate; easy coming easy going rule is applicable in case of black money. If there is a lot of black money in the economy, it will raise the demand for good, especially luxury goods and thus a pressure on price will create.

8.    Obsolete Method of Production

Out dated technology and use of obsolete production process also results in cost push inflation. Thus inflation can be controlled by improving & introducing modern production techniques & methods.