Inflation Rate (CPI) Report
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Causes of Inflation| What are the main causes of Demand-Pull Inflation? | |
| Demand-Pull Inflation | **** |
| Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap When there is excess demand, producers can raise their prices and achieve bigger profit margins Demand-pull inflation becomes a threat when an economy has experienced a boom with GDP rising faster than the long-run trend growth of potential GDP Demand-pull inflation is likely when there is full employment of resources and SRAS is inelastic | **** |
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| Cost-push inflation | **** |
| Cost-push inflation occurs when firms respond to rising costs by increasing prices in order to protect their profit margins. | **** |
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| Summary of Main causes of inflation Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid) Cost-push inflation – higher oil prices feeding through into higher costs Devaluation – increasing cost of imported goods, also boost to domestic demand Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more. Expectations of inflation – causes workers to demand wage increases and firms to push up prices. | **** |
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| Cost-push inflation can be caused by many factors 1. Rising wages If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand) 2. Import prices One-third of all goods are imported in the UK. If there is a devaluation, then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less. Therefore we have to pay more to buy the same imported goods. | **** |
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| 4. Profit push inflation When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth. 5. Declining productivity If firms become less productive and allow costs to rise, this invariably leads to higher prices. 6. Higher taxes If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases. | **** |
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| 2. Increase in Disposable Income: When the disposable income of the people increases, it raises their demand for goods and services. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people. | **** |
| 4. Increase in Consumer Spending: The demand for goods and services increases when consumer expenditure increases. Consumers may spend more due to conspicuous consumption or demonstration effect. They may also spend more when they are given credit facilities to buy goods on hire-purchase and installment basis. 5. Cheap Monetary Policy: Cheap monetary policy or the policy of credit expansion also leads to increase in the money supply which raises the demand for goods and services in the economy. When credit expands, it raises the money income of the borrowers which, in turn, raises aggregate demand relative to supply, thereby leading to inflation. This is also known as credit-induced inflation. | **** |
| 7. Expansion of the Private Sector: The expansion of the private sector also tends to raise the aggregate demand. For huge investments increase employment and income, thereby creating more demand for goods and services. But it takes time for the output to enter the market. This leads to rise in prices. 8. Black Money: The existence of black money in all countries due to corruption, tax evasion etc. increases the aggregate demand. People spend such unearned money extravagantly, thereby creating unnecessary demand for commodities. This tends to raise the price level further. 9. Repayment of Public Debt: Whenever the government repays its past internal debt to the public, it leads to increase in the money supply with the public. This tends to raise the aggregate demand for goods and services and to rise in prices. 10. Increase in Exports: When the demand for domestically produced goods increases in foreign countries, this raises the earnings of industries producing export commodities. These, in turn, create more demand for goods and services within the economy, thereby leading to rise in the price level. | **** |
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| Factors Affecting Supply: There are also certain factors which operate on the opposite side and tend to reduce the aggregate supply. Some of the factors are as follows: 1. Shortage of Factors of Production: One of the important causes affecting the supplies of goods is the shortage of such factors as labour, raw materials, power supply, capital, etc. They lead to excess capacity and reduction in industrial production, thereby raising prices. 2. Industrial Disputes: In countries where trade unions are powerful, they also help in curtailing production. Trade unions resort to strikes and if they happen to be unreasonable from the employers’ viewpoint and are prolonged, they force the employers to declare lock-outs. In both cases, industrial production falls, thereby reducing supplies of goods. If the unions succeed in rising money wages of their members to a very high level than the productivity of labour, this also tends to reduce production and supplies of goods. Thus they tend to raise prices. 3. Natural Calamities: Drought or floods is a factor which adversely affects the supplies of agricultural products. The latter, in turn, create shortages of food products and raw materials, thereby helping inflationary pressures. 4. Artificial Scarcities: Artificial scarcities are created by hoarders and speculators who indulge in black marketing. Thus they are instrumental in reducing supplies of goods and raising their prices. 5. Increase in Exports: When the country produces more goods for export than for domestic consumption, this creates shortages of goods in the domestic market. This leads to inflation in the economy. 6. Lop-sided Production: If the stress is on the production of comfort, luxury, or basic products to the neglect of essential consumer goods in the country, this creates shortages or consumer goods. This again causes inflation. 7. Law of Diminishing Returns: If industries in the country are using old machines and outmoded methods of production, the law of diminishing returns operates. This raises cost per unit of production, thereby raising the prices of products. 8. International Factors: In modern times, inflation is a worldwide phenomenon. When prices rise in major industrial countries, their effects spread to almost all countries with which they have trade relations. Often the rise in the price of a basic raw material like petrol in the international market leads to rise in the prices of all related commodities in a country. | **** |
DATA SETS INCLUDED IN THIS STUDY
| Causes of Inflation | What are the main causes of Demand-Pull Inflation? |
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| Inflation Rate (CPI) Report | **** | **** | **** |
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Date research was conducted: April 25, 2018
Inflation Rate (CPI) Report
Economy
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