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Causes of Inflation Dr Awdhesh Singh, IRS (Retd.) Director, Awdhesh Academy, Former Commissioner, Customs & Indirect Taxes (Central Excise/GST)
1. Demand-Pull Effect The demand-pull effect states that as wages increase within an economic system, people will have more money to spend on consumer goods. . This increase in liquidity and demand for consumer goods results in an increase in demand for products. As a result of the increased demand, companies will raise prices to the level the consumer will bear in order to balance supply and demand
2. Cost-Push Effect The cost-push effect states that when companies are faced with increased input costs like raw goods and materials or wages, they will preserve their profitability by passing this increased cost of production onto the consumer in the form of higher prices. . This will lead to inflation
3. Exchange Rates The price of many locally produced and consumed goods are based on the import price of the similar goods. .Hence, if the exchange rate fluctuate and the local currency is devalued, the inflation rises.
4. Consumer Confidence .When unemployment is low and wages are stable, consumers .This confidence drives up prices as manufacturers and are more confident and more likely to spend money. providers charge more for goods and services that are in high demand .For example, in a booming economy, people purchase more new houses. Contractors experience greater demand for their services, and they raise their prices to capitalize on that demand. Similarly, the building materials included in the houses also cost more as supplies dwindle and consumers increase what they are willing to pay to complete the project.
5. Decreases in Supply .One of the basic causes of inflation is the economic principle of supply and demand. As demand for a particular good or service increases, the available supply decreases. When fewer items are available, consumers are willing to pay more to obtain the item. Supply decreases for several reasons like a natural disaster or environmental effect is at fault for a supply-chain interruption, rains, strike closing of a company or import or export policy of government. .. Supplies also decrease when an item is immensely popular, a phenomenon that frequently is seen when new cellphones or video games are released.
6. Corporate Decisions Sometimes supplies decrease is orchestrated by corporations. Sometime, companies that make popular items frequently raise prices simply because consumers are willing to pay the increased amount. Corporations also raise prices freely when the item for sale is something consumers need for everyday existence, such as oil and gas.
7. The Money Supply Inflation is often caused by an increase in the money supply that outpaces economic growth The value of money is determined by the amount of currency that is in circulation and the public's perception of the value of that money. .When the Central Bank decides to print more currency or put more money into circulation at a rate higher than the economy's growth rate, the value of money can fall.
8. Rise in Tax Rates A rise in indirect taxes like Customs, Excise or GST causes businesses to react by raising their prices to goods or services as they pass on the burden of taxes to the consumer. Alternatively, should the government choose the latter option, printing more money will lead directly to an increase in the money supply, which will in turn lead to the devaluation of the currency and increased prices (as discussed above).
References https://www.moneycrashers.com/what-is-inflation-definit on-causes-inflation-rate https://www.investopedia.com/ask/answers/111314/wha -causes-inflation-and-does-anyon e-gain-it.asp https://www.investopedia.com/terms/i/inflation.asp