Causes of Inflation

Inflation is the biggest worry or cause of concern for government and economists across the world because this is one problem which can destroy the whole economic system if it goes out of hand. Even high growth rate gets shadowed by inflation as is the case with countries like china and India which have been facing a very high inflation in the past 2 years and that is the reason why these markets have been big under performers despite having growth rate of above 7 percent. There are many reasons or causes of inflation, given below are some of the causes of inflation –

  1. High energy prices in the form of crude oil and also higher prices of commodities like copper, steel etc… tend o push up the inflation because these commodities are the lifeline for any economy and any increase in their prices will have an impact on the whole economy.
  2. When the income of people increases it leads o more expenditure by them and since the means of production are limited the mismatch of demand and supply leads to too much money chasing too few goods and which in turn leads to rise in prices of most of the products.
  3. Government policies is another cause for inflation because if government has been following a policy where it s printing more money and increasing the government expenditure without any corresponding increase in production, it also leads to inflation in the long run.
  4. Central banks also plays its part when it comes to inflation because central banks by their policies can make money dear by increasing the interest rates or make money cheap by decreasing the interest rates, the later will lead to spike in inflation rate of a country.
  5. Hoarding of essential goods and commodities can also lead to increase in food inflation and general rate of inflation in a country.

Apart from above there are many other factors which can lead to high inflation because every country has different set of problems and reasons for price rise.

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