Inflation causes you and most anyone else grief. Surprisingly there are many diverse opinions of inflation. However, in the final analysis there are six causes that answers the question of why does inflation occur.
Diverse Opinions of Inflation From the Experts.
Most of us have a negative opinion of inflation. Naturally we ask the question, why does inflation occur? Moreover, are there specific reasons why inflation is happening? Surprisingly, even though most of us have a negative opinion of inflation,there are many diverse opinions about inflation. To illustrate, see below for a wide range of opinions on inflation from the experts.
“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.”
William E. Simon, Secretary of the U.S. Treasury
“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.”
Vladimir Lenin, Revolutionary, Politician, and Political Theorist
“Inflation is taxation without legislation.”
Milton Friedman, Economist
These diverse opinions on inflation reflect poorly on ourselves, our governments, and even unseen forces. For instance, is it the incompetence of our leaders that causes inflation? Or is it a lack of fiscal discipline within ourselves and our institutions? In fact, could it be some unforeseen force within or outside our Government attempting to change our society and the way we live? Also, maybe it could be just a case of supply and demand?
What is Inflation and Why Does Inflation Occur – 6 Causes
First, let’s breakdown what inflation is. To explain, a simple definition of inflation is that it is:
“… a measure of the rate of rising prices of goods and services in an economy.”
Furthermore, the Consumer Price Index (CPI) is a primary measure of inflation in the U.S. Specifically, the CPI measures prices for a basket of goods and services in the economy, including food, cars, education, and recreation.
In the final analysis, there are many reasons for inflation. Also, as many of these causes of inflation are interrelated, it is sometimes hard to tell cause and effect. Below are the reasons that inflation occurs.
1. Rising Production Costs – Cost-Push Inflation.
First, prices increase due to increases in production costs, such as raw materials, transportation, and wages. For example, supply chain disruption causes transportation costs to go up.
2. Rising Consumer Demand – Demand-Pull Inflation.
This is caused by strong consumer demand for a product or service. For instance, everyone needs the latest iPhone and prices go up. Or the government issues tax subsidies for certain products resulting in an increase in demand.
3. Expansionary Government Fiscal Policy.
Also, expansionary government policy leads to a decrease in taxes or increase in Government spending, or increase in money supply. For instance, the Federal Reserve lowers interest rates which increases money available in the economy leading to more demand and increase in prices.
4. Currency Devaluation.
Moreover, currency devaluation against other currencies can increase the cost of imported goods. For example, a Government prints too much money devaluing its currency against other currencies.
5. Rising Wages.
Also, higher wages can increase businesses’ costs and increase consumers’ disposable income to spend more. As an example, minimum wage is raised by $5 adding costs to businesses where they increase prices as well as workers having more disposable income increasing demand where prices go up.
6. Expectations of Inflation.
Lastly, high inflation expectations cause workers to demand wage increases and for businesses to push up prices. This is called inflation inertia. For instance, businesses forecast that their costs will be going up, so they increase prices now.
Also, with inflation you hear the terms overheating, deflation, and stagflation. The chart below, The Three Horsemen, explains the terms in relationship to both the change in change in inflation and Gross Domestic Product (GDP).
For more details on the causes of inflation, see the following references: Investopedia’s What Causes Inflation and Who Profits From It?, TheBalance’s Cost-push and Demand-pull Explained, International Money Fund’s Inflation: Prices on the Rise, and Economics Help’s Causes of Inflation.
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