One of the oddest aspects of economic life is that the prices of goods and services keep rising over time. Looking back, incomes and prices from even just a few decades ago seem remarkably different from today. For example, a cinema ticket in the 1970s cost less than Re 1; today, it’s over Rs 200 in metro cities. So why does inflation happen? Should we be concerned about it, especially when projecting the future value of money?
The Indian government mandates that the Reserve Bank of India keep inflation at a target of 4%, with a 2% margin on either side. Globally, inflation is closely monitored, and central banks are committed to keeping it low. With vast amounts of data being gathered and analyzed, governments can now calculate inflation rates with impressive precision.
Also read: How to invest like Warren Buffett: 6 rules of investing to become ultra-rich
As inflation continues to shape the economy, societies have become increasingly focused on tracking and managing it. But what causes inflation in the first place? In this article, we’ll explore three primary drivers of inflation:
Cost-Push Inflation
Cost-push inflation happens when the cost of production rises, and businesses pass those costs onto consumers through higher prices. This could occur for many reasons: raw materials may become more expensive, wages may rise due to labor shortages or stronger union power, or rents may increase due to a lack of available land for factories or office spaces. When these costs rise, businesses often have no choice but to raise prices in order to survive.
Demand-Pull Inflation
Demand-pull inflation occurs when the demand for goods and services exceeds the available supply. This often happens when consumers are getting wealthier and spending more. As more people can afford to buy the same goods and services, prices naturally rise because the supply can’t keep up with the growing demand.
Inflation Due to Excessive Money Printing
The third major cause of inflation comes from governments printing too much money. While it may sound counterintuitive, governments sometimes print more money to stimulate the economy, hoping to create more jobs and growth. This can be done through actual currency creation, or by increasing government debt and allowing banks to make bigger loans. However, when more money enters circulation without a corresponding increase in goods and services,
» Read More
