Why Does Inflation Occur

Inflation can occur due to a number of reasons like excess demand, more people having money thereby leading to rise in the demand, wrong fiscal policy of a country, etc.
When there is a rise in general price level for all goods and services, it is known as inflation. An inflationary movement could be because of the rise in any single price or a group of prices of related goods and services.

In simple words you could say, it occurs when the total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called inflation.

Causes of Inflation

However, there isn't one single cause and some prominent causes are listed below.
  • If the cost of production of goods and services increases, the price of the end product would also increase. This could lead to inflation.
  • When the business houses and industries increase the price of their goods and services in order to increase their profit margins, it could lead to inflation. This type of inflation is known as pricing power inflation or administered price inflation. In this case, the business houses have the power of pricing their respective goods and services.
  • When there is an increase in the people's earnings, it can lead to increased demand, which in turn can lead to inflation.
  • When there is an increase in the price of the goods and services produced by a certain section of an industry, inflation is likely to occur. The reason is all the industries related to that section of industry would raise the price of their goods and services. For instance, increase in the cost of crude oil can lead to rise in the airfares and the train fares.
  • Fiscal inflation is observed when there is excess government spending. It originated in the US in 1960s at the time of President Lydon B. Johnson.
  • A type of inflation that occurs during or soon after a war is known as hyperinflation. It is often short-lived and is sometimes known as galloping inflation.
  • Stagflation is another type, which occurs when an economy faces high unemployment rate and economic stagnation.
Whether it is good for an economy or not depends on its type and the causes. It is not necessarily an evil. It affects the people of different strata in different ways. It also occurs at the time of recession, economic depression, and financial crisis.