Inflation: When prices increase, the general public often blames it on “inflation” and calls it a phenomenon that will lead to the impoverishment of society.
However, while inflation is generally seen as a bad thing, in reality it is not so sinister.
Inflation simply means a rise in the general price level of goods and services in an economy.
It is measured by changes in the cost of goods and services with reference to some base period.
There are many potential causes of inflation, with most being related to supply-side factors rather than demand-side factors.
Demand-side factors refer to situations where demand for goods and services outstrips supply (i.e., when there is not enough supply or availability of goods).
Supply-side factors refer to situations where the availability or supply of goods outstrips demand (i.e., when there is too much supply or availability available).
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7 Causes of Inflation and How to Fix Them
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Inflation is a persistent problem in almost every country. People find it difficult to manage their daily expenses and budget because of the rising cost of goods and services. Indeed, inflation can be a challenging and painful phenomenon, but you don’t have to fret about it. There are many reasons behind this rise in prices, but there are also ways to combat it. In this article, we will explore some common causes of inflation as well as potential solutions that can ease the burden on your budget.
What is Inflation?
Inflation is a rising cost of goods and services. Prices of products like food, clothing, and transportation tend to increase when there is inflation. This happens when there is an increase in supply and demand for goods and services. An increase in demand for products can cause the prices of goods and services to rise, which results in inflation. To understand what causes inflation, first, we need to understand how to measure it.
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How to Measure Inflation?
The easiest way to measure inflation is the “Cost of Living Index”. The cost of living index measures the rate of increase in the cost of goods and services. The cost of living is the average amount of money needed to purchase a certain amount of goods or services. The standard way to calculate the rate of inflation is by finding the difference between two periods by comparing average prices of a basket of goods. The difference between the two periods is the inflation rate.
Defining Cause of Inflation
There are many causes of inflation and they are different in each country. One such reason is rising labour costs and growing unemployment. When the demand for labour is higher than the supply, the labour unions negotiate increases in wages. When this happens, companies have to increase the prices of their products to maintain profitability. Higher commodity prices are another reason for inflation. Commodities are basic raw materials like copper, aluminium, crude oil, etc. These are imported by many countries to meet their demand for these goods. The value of these commodities is determined by their supply and demand. When the demand for these commodities is greater than its supply, their prices go up. The monetary policies followed by the central bank can also cause inflation. When the central bank increases the money supply or lowers the interest rates, the demand for money goes up. This increase in demand is met by the increase in money supply, which can cause inflation.
Monetary Policies and Excessive Money Supply
The demand for goods and services increases when there is an increase in the money supply. The demand for goods and services increases only when the income of the people remains the same. An increase in the quantity of money in an economy lowers the value of money. This is because there is more money in the economy and a lower demand for it. When there is an increase in demand for commodities, their prices go up. The higher prices of commodities are a result of the higher demand for these commodities. This happens because there is more money in the hands of the people. The commodities that see an increase in demand are basic materials like crude oil, gold, silver, etc. The people who earn more spend more on these commodities, which causes their prices to rise. When the demand for these commodities outstrips the supply, the prices go even higher. This higher demand is because of the excess money in the economy.
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Commodity Speculation and Asset bubbles
Commodity speculation is the process of buying and selling commodities in the hope of making quick profits. Commodities have an inherent volatility in terms of supply and demand, which makes them suitable for short-term trading. This is one of the reasons why commodities are traded. The commodity bubbles are a result of the high speculations in commodities. When the commodities fall in price, the speculators sell them off. The fall in prices of commodities can cause economic harm by distorting the economy. When the bubbles burst, commodities like crude oil and copper fall in price. This happens because the demand for these commodities decreases, which leads to a fall in their price. When the prices of commodities fall, the prices of goods made of these commodities also go down.
The causes of inflation are numerous, but what’s important is that there are ways to counteract it. There are several strategies you can employ to avoid inflation. You might have to change your spending habits a little bit, but it’s worth it if it helps you stay on track financially.