If there is an excess of aggregate demand in the economy over aggregate supply, the general price level will tend to increase, which leads to inflation. In this article, we are going to discuss the causes of inflation.
Demand Pull Inflation
Demand-pull inflation refers to the inflation generated by the pressure of excessive demand in an economy. If there is an excess of aggregate demand in the economy over aggregate supply, the general price level will tend to increase, which leads to inflation.
Causes of Inflation
Heavy population pressure led to an increase in the demand for food items and other essential goods in the Indian market. This excess demand condition in the product market led to a price rise and it is termed demand-pull inflation.
Growing government expenditure:
A continuous increase in government expenditure on infrastructural development and other developmental plans is essential. This generates more employment and income opportunities. It means additional purchasing power for the public to demand more goods and services.
Growing supply of money:
Increasing government expenditure and the credit policy of the government leads to an increased inflow of money within the economy. This in turn leads to an increase in demand for goods and services within the economy.
An increase in the general price level of an economy with an increase in the average cost of production is called cost-push inflation. Cost-push factors are an increase in the wage rate and an increase in the prices of raw materials. Producers increase the prices of goods and services to maintain the profit rates after an increase in the cost of production.
Causes of Inflation
Rise in wages:
The rise in wages is considered a determinant of cost-push inflation. Because of trade unions, workers have organized strongly to get higher wages. This rise in wage cost may lead to the imposition of higher product prices by producers. Hence, when the average prices of different consumption goods increase, workers would again demand higher wages.
Increase in the price of basic materials:
Basic materials such as steel, chemicals, and oil are used directly or indirectly in major industries. Thereby any increase in the prices of these basic materials affects the entire economy and the prices tend to increase.
An increase in taxes such as excise duties, sales tax, and value-added tax, where taxpayers can easily shift the burden of tax to the others, leads to an increase in the prices of different commodities.
Meaning and Functions of Money