Causes of Inflation

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The government can introduce policies which cause inflation

Some of these policies include:

> Increase in indirect taxes - this can lead to a "wage-price spiral"

> Increase in expenditure in the economy - increasing social welfare introduces more money into economy, encourages greater spending and demand

> Government relaxes banking regulations to allow banks to lend out more money to personal borrowers to stimulate demand in the economy

Causes of Inflation

There are three main causes of inflation; Demand-Pull Inflation, Cost-Push Inflation and Government-Induced Inflation

Demand Pull Inflation

This occurs when the economy can't produce enough goods/services to meet the demands of citizens.

It's an event of too much money chasing too few goods.

Because of the excess demand, there is price competition which drives prices up

Cost-Push Inflation

This occurs when the selling price of goods/services are increasing to compensate the producer for an increase in the costs of production

Increases in costs of production arise as a result of an increase in the price of labour, or an increase in the price of raw materials

Government-Induced Inflation

Causes of Inflation