Inflation
Inflation
Definition:
Inflation is a continuous and sustained increase in the general price level
of goods and services in an economy over a period of time.
In simple words:
👉
When prices of almost everything increase, and the value of money falls, it
is called inflation.
Effects of Inflation:
- Decrease
in purchasing power
- Increase
in cost of living
- Uncertainty
in business decisions
- Fixed-income
groups (salaried people) suffer the most
2. Causes of Inflation
Inflation can be caused by several factors. Major causes
include:
A. Demand-Pull Inflation
Occurs when aggregate demand is greater than aggregate
supply.
Example:
- High
government spending
- Increased
consumer spending
- Easy
credit and loans
- Increase
in exports
Result:
👉
Too much money chasing too few goods.
B. Cost-Push Inflation
Occurs when the cost of production increases, forcing
producers to raise prices.
Causes include:
- Increase
in wages
- Increase
in raw material prices
- High
cost of imported goods (like oil)
- Increase
in electricity and fuel prices
Result:
👉
Production becomes expensive, so prices rise.For next class
C. Imported Inflation
When the prices of imported goods increase, domestic prices
also rise.
For example:
- Increase
in international oil prices
- Depreciation
of local currency (rupee), making imports costly
D. Monetary Causes
- Excessive
money supply
- Overprinting
of currency
Results in:
👉 More money in circulation → higher demand → higher prices.
E. Structural Issues
- Low
agricultural productivity
- Poor
supply chain
- Hoarding
and black marketing
These create artificial shortages and raise prices.
