Demand Pull Inflation
This is probably the most easy cause of inflation to remember in that it basically refers to a demand that is greater than the supply in a given market.Therefore as more people want your product than you can supply, the price is forced upwards as it's likely that you can make a greater profit per unit sold.
Demand pull inflation takes into account a number of factors:
The Exchange Rate
When there's a depreciation of our currency relative to others, it means that our currency (Let's use the dollar) is now weaker against the other currency in the exchange rate. This means that simply, you need more dollars to buy anything abroad that is priced in a different currency which of course also means that anything imported increases in price when looking at its cost in dollars. Of course this means that the other currency becomes stronger and so the problems for them are reversed.
Faster growth in countries
Generates more demand from overseas. For example Jaguar are selling a lot of cars in Asia which has been helped by the boom in the Chinese Economy. Therefore there is more demand from domestic buyers as well as buyers from overseas and Jaguar can only produce a certain amount per year.
The Wealth Effect - Rising Affluence and Property Prices
If house prices are generally rising (or any financial asset for that matter) this means that although the asset is valued higher, the owner's extra value will still be tied up. In the property market and stock market it takes time to receive this extra cash due to the selling periods attached to them. An Estate Agent must look for a buyer in the same way that a Stockbroker has to match a buyer and seller. However the point is that they seem relatively wealthy during the booms in these markets and so as they are worth more, will tend to become confident and so generate demand for goods and services.. Therefore if demand increases ceteris paribus price increases for that particular product.
Reduction in Tax
If the Government decreases the rate of income tax (a direct form of tax) then people's net incomes increase. Hence their real incomes have also been raised and so are encouraged to spend more if their monthly balances are marginally bigger if they chose not to save it for a rainy day of course...
Cost Push Inflation
This can be broken down into two sub sections:
Cost Push Wages - An increase in wages (maybe through the pressures of Trade Unions or minimum wage increase)
Cost Push Imports - An increase in the cost of imported raw materials (often due to currency depreciation)
Both of the above show an increase in the cost of production to firms and as we know from microeconomics, these firms enter the market in order to maximise profits and so they are forced to increase their prices in line with the rising cost per unit in order to maintain their profit margin. Hence they have effectively passed this extra cost on to the consumer. This is Price Push Inflation.
Expectational Inflation
This idea comes down to speculation that prices are going to rise and so costs will also rise for firms. Hence in anticipation of this decision makers raise prices to offset the effects of inflation.
And finally, what do Monetarists think about inflation?
Well, they think that it is the supply of money that can grow or shrink which is the most significant factor in influencing inflation. Therefore they think that monetary policy and quantitative easing are more useful than the like of Fiscal Policy. This seems sensible as the government increases demand which results in demand pull inflation. However whereas we know that by simply creating more money to circulate we will cause hyperinflation, quantitative easing carefully controls the amount in circulation and ensures that the cash trickles down through the economy and doesn't cause inflation as fast because the excess demand takes longer to filter down through the financial services sector through to the public. But this is just theoretical.
Why not read:
Inflation Introduction , Effects of Inflation
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