What causes inflation?
The term inflation refers to the fact that when the purchasing power of a nation falls due to an increase in general prices, the value of money decreases and the purchase of goods and services becomes more expensive. Inflation is a normal economic phenomenon that should occur at a predetermined rate, anything above that should be cause for concern. The CPI or consumer price index is the most common indicator of inflation that measures the increase and decrease in the prices of basic goods and services. Another very important tool for measuring inflation is the GDP deflator, which measures price changes in goods produced in the country.
High levels of inflation hinder the economic performance of any country, so it is mandatory to identify the causative factors. The following are some of the reasons that cause inflation,
1) Excess printing of money.
2) Increased production and labor costs.
3) High levels of lending and currency devaluation.
4) High level of taxes
Excess money printing:
The general cause of inflation that has been agreed upon by most economists is when there is an increase in the money supply or a decrease in the quality of the goods on offer. The money supply plays a bigger role in inflationary pressure, the more money is pumped into the economy, the higher the inflation. If the money supply is not properly controlled by the Federal Reserve, it can actually grow faster than the economy’s potential output, or real GDP. As a result, prices end up rising at an accelerated rate to maintain the surplus of foreign exchange. This is called Demand-Pull, in which prices are forced up due to high demand. An increase in the amount of money in circulation relative to the supply capacity of the economy leads to an increase in demand, which drives up prices. Low interest rates correspond to high levels of money supply and allow for more investment in great deals and new ideas, which ultimately leads to unsustainable levels of inflation as cheap money is available. The 2007 credit crunch is a very good example of this at work.
Increased production and labor costs:
Another cause of inflation that must be taken into account is an increase in the cost of production that leads to an increase in the prices of final products. The expensive raw material leads to an increase in the cost of production which ultimately causes the company to increase the prices of the final product in order to maintain constant profits. Rising labor costs can also lead to inflation. As workers demand wage increases, companies often pass those costs on to their customers.
High levels of lending and currency devaluation:
High levels of borrowing are a curse for any nation and can result in an increase in the level of inflation, as international loans and national debts have to be repaid with added interest, which ultimately ends up driving up prices in the country. as a way to keep up to date. with debts. This causes the exchange rate to fall, leading to more inflation as the government has to deal with the gap created between import/export levels.
High level of taxes:
An increase in federal taxes, either direct or indirect, on consumer products leads to inflation, as suppliers shift the burden to the consumer. A classic example of this cost-rising or inventory inflation is the oil crisis of the 1970s after OPEC raised prices and the US experienced double-digit inflation levels as a result during that period. . As oil is commonly used, a sharp increase leads to a rise in the prices of all commodities. Law and order situation and wars can often cause inflation as the government has to pay back funds taken from the central bank. The impact of shapes can be seen in everything from international trade to labor costs to demand for the product, which is why it always inflates prices in the end.
Conclusion:
Finally, a constant level of inflation must be maintained as it shows the growth of an economy, but any increase to an unsustainable level will undoubtedly have a negative impact on the economy, just as it happened in 2008 with an increase in world prices of oil, food, steel and other basic products.
