Inflation (Economics)

"Too much money chasing too few goods is called Inflation."- W A L Coulborn

In simple words inflation is the increase in the general price level of goods and services in free market economic system or in other way money losses its value. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the purchasing power.

Types of Inflation:

Two Major types of inflation are explained below

Demand Pull Inflation: The increasing demand for goods and services can bring inflation in the economy. Demand may increase due to of many factors such as, increase in population, low supply etc.

Cost Pull Inflation: The increase in cost of production forces the manufacturer to raise the prices of goods and services such as increase the Power charges, increase in raw material etc.


Top 10 Causes of Inflation:

• The issuance of currency by the state, beyond the requirement causes inflation in country.
• When the commercial banks of  a state issue more loans from a certain limit brings inflation in economy.
• The population growth rate may be higher than the rate of economic development, the supply of goods lags behind which causes inflation.
• The Increase of income level in a country may also raise the rate of inflation.
• Raise in indirect taxes and interest rates on loans and advances increases the inflation. It forces the manufacturer to increase the prices of goods and services.
• The increase of investment level in a country without increase in production causes inflation in country.
• When government prepares deficit budget to complete its various projects, used to issue more currency or borrow money from different sources. which may cause inflation in economy.
• Low production level due to of many factors, like old machinery, unskilled labor, load-shading etc, causes inflation.
• Inflation in other countries may increase in price level at home market. Especially when the prices go up in producing countries  it affects the prices of consuming countries.
• Natural calamities like flood ,earth quack etc may increase the inflation rate in country. These calamities affect the production level to meet the demand which creates inflation.

Effects of Inflation on Society: 

• People whose income are fixed hurts the most, because their income remain the same while the value of money decreases. On the other hand the people whose income is flexible enjoys the effect of inflation. For example a sales officer who gets the commission against the sale, will get the commission according to the new prices of products. If he gets the 2% on total sales and his sales of worth $ 100, he will get $ 2 and if the prices increase the commission will be automatically increased.

• Inflation also hurt the savers, as the prices rise the real value of savings decreases.

• Unanticipated inflation harms Creditors (lenders), as prices go up, the value of dollar goes down. So the borrower pays back less valuable dollars than those received from lenders. On the other hand inflation is favorable for the Debtor (borrower).