Causes of Inflation
When prices rise, consumers lose purchasing power. An inflation rate of 2% to 3% is good for the economy but higher rates of inflation are very bad for the consumers and the economy as a whole.
The most common causes of inflation are:
- An imbalance in supply and demand. Inflation tends to increase when consumer demand for goods and services increases but the supply side is unable to meet this demand. This is known as demand-pull inflation.
- An increase in factor input costs (cost of land, labour, capital) pushes up prices. The price rise which is the result of an increase in the input costs leads to inflation. This is known as cost-push inflation.
Effects of Inflation on the Economy
Effects of Inflation on the Economy: Inflation is the sustained rise in prices of goods and services over time. This leads to the erosion of purchasing power. Purchasing power is the value of a currency expressed in terms of the number of goods and services that can be bought by one unit of the currency.
During periods of rising prices, uneven inflation acts like a hidden tax, hitting certain groups disproportionately. This loss of buying power, particularly for those already struggling, is the most concerning consequence of inflation.
In this article, we will read about Inflation and mainly the effects of inflation on the economy. We will also discuss the types and causes of inflation.
Table of Content
- What is Inflation?
- Types of Inflation
- Causes of Inflation
- Effects of Inflation on the Economy
- Effects of Inflation on the Indian Economy