There are three main views about how inflation is caused:
1. Demand-pull. This means buyers want to buy more than sellers can actually produce; so sellers start to put prices up.
2. Cost-push. This means business costs start to rise (eg oil prices rise, or wages start to rise) and sellers need to put prices up to compensate.
3. Monetarist view. This means the government allows too much money to be created . If the supply of money rises, then the price falls just as if the supply of potatoes rises, then the price falls. The price of money here is how many goods and services it will buy. If the price of money falls, then it will buy fewer goods and services ie prices of goods and services rise and the value of money falls. This is inflation.
4. In practice, we might get bits of each.
How is Inflation Caused?
Re: How is Inflation Caused?
Inflation's effects on an economy are manifold and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment of productive capital and increase savings in non-producing assets. e.g. selling stocks and buying gold. This can reduce overall economic productivity rates, as the capital required to retool companies becomes more elusive or expensive. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.