Q:

Why has inflation risen over the years?

A:

Quick Answer

Inflation can rise as a result of a number of factors, such as an excessive monetary supply — which devalues currency, causing a rise in prices — and excessive pressure on supply and demand, usually caused by natural disasters, for example. Inflation is often manageable to some degree by implementing policy changes, or using banks to enforce an exchange rate, although these measures are not always successful.

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Full Answer

The continued rise of inflation is most commonly attributed to the quantity theory of money, which states that monetary value is directly linked to the pricing levels of goods and resources.

Inflation can also be affected by perceptions of the markets. If companies suspect that prices will rise, for example, they often take measures to protect themselves by taking expected inflation levels into account when dealing with almost all aspects of the business. This can manifest in increases in rents, changes in wages or values of contracts.

The major problem with perceptions of rising inflation is that they can easily become self-fulfilling. Once large numbers of companies and organizations adopt a future-proofing approach, they effectively create a climate of higher inflation.

In fact, inflation expectation has become such as major driver behind inflation levels that many policymakers often attempt to manage and influence these expectations in order to keep inflation lower where possible.

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