What Causes Inflation
The subject of inflation has come up a lot lately with the economical challenges most people are facing, but what causes inflation? There is a plethora of reasons for a country to have inflation ranging from increase in production cost, reduction in a country purchasing power, tax increase on consumer products and services, labor cost, as well as foreign problems.
Inflation occurs when the price of goods and services increase and consumers receive less for the good and service than they did in the past.
Inflation occurs due to various factors such as in a demand-pull economy. In a demand pull economy, a country may print more money to handle a problem; the effect of the excess money on the market may cause a rapid increase in prices, if there is less products or services on the market. Thus, the excess money requires monitoring to avoid the chances that inflation will occur.
Increase production cost also causes inflation. This happens because the final product cost is increase due to the increase production cost. For example, if the fabric to make a shirt increase in price, the production cost increases as well and you pay more for the shirt. Since, the changes often require that the corporation increase their prices so they can maintain profitability.
Labor cost can cause inflation as well. When an employee demands higher wages, the company may grant the higher wages to the employee. However, they will pass the extra cost to consumers of their of products or services to make up for the extra labor cost.
International factors can also cause inflation. Countries borrow money from each other, and they have to pay interest on these money. The countries may decide to increase their cost to handle the debt incur creating inflation. Additionally, the currency exchange rate may cause inflation since the import or export rate might differ between nations.
Additional, federal and state taxes may cause inflation. If the government taxes consumable products such as fuel, the supplier of these product will pass the additional cost on to the consumer.
An inflation that increases at a moderate level is not a bad thing as it is a way to show economical growth, but when the rise in inflation becomes unsustainable the impact may be devastating such as the high gas prices in 2008 as well as the gas problems in the 70’s.