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What are the Major Causes of Inflation?

Updated on April 7, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

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Introduction

Inflation is one of the most discussing phenomenons in the day to day life of human beings. There are different opinions among economists about the inflation from early time onwards. By simple words, inflation refers to the phenomenon in an economy, where the aggregate demand for goods and services exceeds over the aggregate supply. This may create lot of problems. The increasing of price level is an important problem among them. This may badly affect the common people even the middle class in the society.

As mentioned above, people see the phenomenon of inflation as an economic disaster, so you must try to understand the root cause of inflation. Then only you can suggest a good solution for inflation. Any way this article is very briefly dealt with major and commonly seeing causes of inflation.

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Causes of Inflation

There are numerous causes for the phenomenon of inflation. Some of them are listed below.

1) Excess of money supply

This is one of the main causes of inflation. When the money supply increases people began to earn more income. This may lead to the increasing of demand for goods and services. But at the same time the total supply of goods and services may not increase proportionately to the increase in aggregate demand. In short, it leads to rising of prices of goods and services. This will be resulted in further inflation.

2) Over spending of government

This is also another cause for inflation. When the government increases its expenditure or spending (for different programs or projects etc) there will be an increase in the total volume of money supply in the economy. As mentioned above, this will also increase the aggregate demand and creates the burden of inflation.

3) Liberal monetary policy

Suppose, when the financial authority of the country decided to follow a liberal economic policy, it will also increase the money supply. In other words, when the monetary system allows the borrowers to take more credit, it will automatically increase the aggregate demand. Finally the result will be inflation.

4) Illegal money

This refers to the presence of fraud or unaccounted money in the economy. The illegal money may be in the form of corruption, illegal transactions etc. Such money creates unaccountable money in the financial system. This will also increase the aggregate demand and will result in inflation. Another form of illegal money is may be due to tax evasion. That is when the people did not pay the tax correctly, it will increase the disposable income of the people and by increase the aggregate demand. This will also lead to inflation.

5) Excess exports

Even though the increase in net export (total exports deducted by total imports) gives a trade surplus, there is a chance for a big issue which may lead to inflation. That is when a country exports more and more, the country will earn huge income. That is the demand for domestic products is very high in foreign market. This will increase the flow of income to the country. So, naturally the aggregate demand of the domestic people will increase. If the supply of goods and services failed to meet the hike in aggregate demand, this will again increase the price level and by resulted in inflation.

6) Repayment of government liabilities

When the government repays its debt to the internal parties, it will increase the money supply in the country. That is the public will get more money and they will demand more. This excess demand ends in inflation.

7) Huge and mega Projects of government

When the economy starts many mega projects, it will create inflation. Actually huge projects are aiming for long time. And so, the output of such projects can enjoy only after few years later. But during the initial stage of such projects, the initial investment creates more employment opportunity especially in construction field. This will increase the consumption expenditure, which increase the aggregate demand. But, since the benefits can enjoy only after certain periods there will be shortage of supply in commodity in the short run. This excess demand resulted in inflation.

Conclusion

Today, inflation is one of the most discussing social issues irrespective of developed or developing economies. Since financial or economic matters are playing a vital role in the human life, you must able to understand the economic events happening around you. Generally inflation is a phenomenon in which the aggregate demand and price level raises over the available supply of commodities. There are many other reasons than listed above, which create the burden of inflation. The above listed causes are the most commonly occurring causes for inflation.

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      IRSHAD CV 3 years ago from India, Kerala

      Thanks for your respond

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      Dianna Mendez 3 years ago

      Good thoughts on this topic. I only wish it was something our country didn't have to deal with today.