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CAUSES OF INFLATION IN ANY ECONOMY

CAUSES OF INFLATION

  •  Increase in demand: When the demand for goods and services is greater than supply, this results in inflation (demand- pull inflation).
  •  Low production: Low production of goods and services can lead to their scarcity and when supply cannot meet up with high demand, inflation sets in.

MAJOR CAUSES OF INFLATION

  • War: War is a major cause of inflation as people no longer produce, resulting in high volume of money pursuing fewer goods.
  •  Increase in salaries and wages: When salaries and wages are increased, without corresponding increase in supply of goods and services, it can lead to excess money in circulation chasing fewer goods.

meaning of economics

  • High cost of production: When there is high cost of production, manufacturers build in this high cost into the cost per unit and pass it to consumers, leading to cost-pull inflation.
  • Budget deficit: When government expenditure is more than its income, it results in budget deficit and this leads to inflation.
  • Population increase: A sudden rise in population will result in a corresponding rise in demand for goods and services and if there is no corresponding rise in supply, it will result in inflation.

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  • Excessive bank lending: This can lead to excessive money in circulation chasing fewer goods and services.
  • Level of importation: High cost of importing raw materials can lead to high cost of goods, which is passed to chasing few goods and services.
  • Hoarding: Hoarding, which is the act of creating artificial scarcity of goods, can lead to inflation.
  • Inadequate storage facilities: When goods produced cannot be stored for future use, it can lead to scarcity, resulting in inflation.
  • Industrial strike: Prolonged strike can cause scarcity of goods and services, leading to inflation.
  • Money laundering: Mass transfer and injection of money into circulation can also cause inflation.
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