What Causes Inflation?


Quick Answer

Inflation is caused primarily by either a rapid rise in wages being paid to workers or by a rise in the price of goods that are commonly purchased by the general population. If the inflation is due to a rise in wages, it is known as cost-push inflation, whereas a rise in the price of goods and services due to demand is known as demand-pull inflation.

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Full Answer

Cost-push inflation includes a rise in any part of the production costs, including wages. As the cost of production increases, the increase is passed onto the consumer, raising the price of the product. A good example of this is the result to an economy when the price of oil rises. Any process that uses oil during production gets more expensive, so the product rises in price accordingly. For the rise to be considered inflationary, it must affect the economy as a whole, rippling through the market to raise the general cost of living.

Demand-pull inflation is the result of a rise in demand for a product that cannot be met immediately by a rise in supply. For example, a switch in consumer tastes to wheat-based products will cause a rise in the demand for those products. Until companies meet that rise, the wheat-based products eventually fail to meet the demand goals, causing the price for the products to rise.

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