Causes of inflation in economics with Examples

Causes of inflation in economics

Talking about the causes of inflation refers to all the reasons why there are general increases in the goods and services of a country during a certain period of time. Here we will describe the Causes of inflation in economics.

There can be many causes for which prices are increased, however, before knowing some of them, it is helpful to know that there are 2 main processes by which inflation occurs, these being inflationary pressure and the mechanisms of propagation , of which later many of the causes of inflation are subdivided.

Inflationary pressure occurs when there is an imbalance between supply and demand, causing an increase in market prices, deriving from these various sub-reasons such as:

  • Monetary inflation : When the supply of money is higher than the demand for it, there is an increase in the price of the national currency, causing it to devalue and therefore market prices increase.
  • Inflation due to monetized fiscal deficit : Sometimes governments can be faced with the scenario of a fiscal deficit, having to solve it through indebtedness, either by printing paper money or subtracting from the international reserve, causing an increase in the prices of goods and services.
  • Cost inflation : When there is an increase on the costs of the material for the production of certain goods, an increase also occurs on the final price of the same, implying a process of inflation.

The propagation mechanisms, on the other hand, allow inflationary processes to continue due to the fact that they transfer the increase in prices from one market to another, thus spreading an economic imbalance, deriving from these various sub-reasons such as:

  • Inflationary expectations.
  • Pressure allocation mechanisms based on a past inflation period.

It is important to remember that inflation can be caused by multifactorial reasons, that is, the economy of a Nation can be affected by several reasons at the same time.

Major Causes

1. Public expenditures

As you know, governments are responsible for issuing money . When they decide to print more currency than usual, they can cause their purchasing power to be reduced. So prices go up.

Another way public spending can contribute to inflation is through taxes . The higher collection increases the companies’ costs and, in this way, the increase is passed on to the prices for the final consumer.

2. Cartels

When there is little competition in the same segment of the economy , companies can form so-called cartels. In them, organizations control the means of production and distribution of products and services.

In this way, companies have the power to regulate supply and also determine asset prices, leaving customers hostage to their policies. Despite being a practice opposed by Brazilian law, this type of agreement can still happen not explicitly, directly affecting inflation.

3. Indexing

Indexed prices are pegged to indexes . That is, the tag value of an item is directly related to another value or rate.

It is common, for example, for rent prices to be indexed to the IGP-M. Thus, payment readjustments are carried out according to the rate of the General Price Index – Market. In this case, the price keeps accumulating the readjustments and, in this way, the inflation of today is the initial level of tomorrow.

4. Production costs

Whenever raw materials, taxes or other production costs increase, the value is passed on to the consumer in the final price. Therefore, when there is a fluctuation in company spending, inflation also rises.

5. Insufficient offer

This is one of the real causes of inflation. In the supply and demand relationship, when there is not enough production, the buyer pays the amount necessary to acquire a good or service.

Thus, if demand is greater than supply, the natural tendency is for prices to rise. The strategy is also adopted as a way to curb the search for a certain asset.

6. Inertia

The sixth reason that leads to widespread price increases is inertia. That is, the stagnation of policies that keep values ​​rising.

For example, a group of businessmen believes that inflation will rise in the coming months. In advance, they raise the sales value of their products. As a result, there will really be inflation, as the business community bet on rising prices , even if there was no other reason for that.

Examples of causes of inflation.

  1. One of the causes of inflation is also inertial inflation, that is, one in which the mechanisms of propagation of inflation are installed in an economy during a certain period of time.
  2. The causes of inflation can come from multiple causes, only some of them being demand inflation, cost inflation, structural inflation, etc.
  3. There are two main categories into which the causes of inflation, inflationary pressure and the mechanisms of propagation are classified.

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