Why Does Inflation Occur?

In terms of economics, inflation can be defined as the rise in the prices (general level) of services and goods in an economy over a certain period of time. In earlier days, the term inflation was used to refer the increases in supply of money, but these days the “inflation” is purely used to refer the increase in levels of prices.

On the other hand inflation can also be defined as decrease in the value of money (or loss of the purchasing power in some medium of the commodity exchange). Most accurate measure of the inflation is known as “inflation rate”. Inflation rate is defined as percentage change in the price index over a certain period of time.

In most simple words, you can conclude that inflation occurs in an economy when the net demand for services and goods exceeds the total supply. Now, because of less supply, the net prices of these services/goods increases and this kind of situation is known as inflation.

inflation-occurEffects of inflation
Inflation produces detrimental effects on the health of an economy. For example- the uncertainty about the future behavior of “inflation rate” may restrict the investors to invest in the market. If consumers of an economy came to know that prices are going to increase in coming future then they will over purchase the goods (in the fascination of present lower prices), this will cause shortage of various goods in the market.

Reasons of inflation
Situation of inflation can occur at any time, and its occurrence depends upon a number of reasons. No specific cause is responsible for the occurrence of inflation. But some proposed reasons of the inflation are mentioned below-

1. If the production cost of various services and goods increases then naturally the prices of the final products would also increase. This leads into the situation of inflation.

2. Inflation occurs when industries and business houses increase the total prices of their services and goods in order to amplify their profit margins. This category of inflation is called as “administered price inflation” or “pricing power inflation”. This type of inflation is tedious to tackle because various industries and business houses have the complete authority/power of pricing their services and goods.

3. A situation of inflation occurs when a specific section of a mass industry increases the prices of its services and goods, because this step of a particular section of a mass industry will produce considerable effects on various other sections of industry also. For example- increase in the price of crude oil will spontaneously cause increase in the train fares and airfares.

4. A special category of inflation known as “Fiscal inflation” occurs, because of excessive spending of the government. Fiscal inflation was first observed in United Sates of America at the time of President Mr. Lydon Baines Johnson.

5. One another type of inflation is known as hyperinflation. Hyperinflation occurs during or after a heavy war. This inflation is also popular with the name of galloping inflation.

6. Another severe type of inflation is known as stagflation. It occurs in an economy which faces economic stagnation and high unemployment rate.

So we can say that inflation has some serious consequences on the economy as a whole. So the government should make some strict policies to curb inflation and thus help the country to have a stable economy

Category: Business & Finance, Economics

One Comment on “Why Does Inflation Occur?”

CNPatil wrote:

Bank interest rate should be clubbed with inflation rate because Fix Deposit amount decreases comparatively.. Is there any system to compensate the real value of money.

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