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What are the major causes of inflation?

What are the major causes of inflation?

Answers

Wilfred
1. Cost-push inflation occurs from the supply side of an economy when the increasing costs of production
push up the general level o prices. It?s largely as a result of the following:-
a) Wage costs arising from institutional intervention: Powerful trade unions, for instance will bargain for higher wages
without corresponding increases in productivity. Since wages constitute production costs, employers will usually pass the
increased wage cost on to the consumer in terms of higher prices.
b)Structural rigidity: Slow mobility of resources between the various sectors of an economy has an effect of increasing
prices. This is an example of most developing countries especially those which are predominantly agricultural, since such
sectors are subject to natural and other factors which cause shortages and hoarding, hence frequent price increase.
c)Exchange rates: The determination of exchange rates at any given time depends on whether or not an economy has been
liberalized. Any time a currency depreciates or otherwise devalued, domestic prices of goods and services tend to increase
d)Mark-up pricing decisions: Many large firms set their prices on a unit cost plus profit basis. This makes prices more
sensitive to supply than demand influence and may tend to increase with rising costs, whatever the state of the economy.

2. Demand-pull inflation is the excess of aggregate demand over the value of output (measured in constant prices) at full employment will create excess demand in many individual markets, and prices will be bid upward. The rise in demand for goods and services will cause a rise in demand for factors and their prices will increase as well. Thus, inflation in the prices of both consumer goods and factors of production is caused by a rise in aggregate demand.
General shortage of goods and services: Whenever there is supply deficiency of goods and services in times of say, disasters like earthquakes, floods, wars or drought, the general level of prices will rise because of excess demand over supply.
Government spending: This certainly arises as a result of government action. Governments may finance spending through budget deficits; either resorting to print money with which to pay bills or what amounts to the same thing, borrowing from the Central bank for this purpose. Many economists believe especially so due to fiscal indiscipline of most governments.

3. Monetary type of inflation stems from the policy orientation/frameworks of the monetary authority (central bank) which may be in form of sale of treasury bills (TB?s) at relatively high interest rates (return) and thus creating a tendency for commercial banks to increase their base lending rates; the overall effect is an upward pressure on the general level of prices. This argument is a close relative of the quantity theory of money which states that a disproportionately large increase in money supply cause the general level of prices to rise faster.
Wilfykil answered the question on February 6, 2019 at 12:52

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