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Causes and Effects of Inflation

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Causes and Effects of Inflation
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Causes and Effects of Inflation Supply and demand are one of the key factors when it comes to the economics of a country or region. The two factors happen to be the greatest determinants of prices. In cases where there is a high demand and low supply in a region, the prices of commodities or services provided tend to hike. The hiked prices due to high demand and low supply lead to inflation. Inflation has become a worldwide phenomenon that has seen the cost of living to shoot up in most parts of the world. This increase in the cost of living is attributed to by the increase in the demand for basic commodities and a decrease in their supply due to increased cost of production. Even though the whole world experiences inflation, different countries have different inflation rates depending on their development stages. The major factors that contribute to the increase or decrease in inflation rates in a country include the quality theory of money approach, excessive demand and decrease in supply. This paper will discuss these causes of inflation and the effect they have on the economy as a whole.
Causes of Inflation Many factors contribute to the increase or decrease of the inflation rate in a country. Spending habits of individuals happen to contribute greatly to increased inflation rates. A good example is when people have too much money to spend on a given product. The increase in the demand for that particular commodity may not match up with its production. This, therefore, leads to an increase in demand and a decrease in supply hence hiked prices. In economies where workers demand huge pay rises or the cost of raw materials happen to be on the rise, cost of production tends to increase thus increasing the prices of products or services. Central banks handle cases of increased or decreased inflation in…...

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