In the economic parlance, inflation is the rise in the prices of goods and services. People often wonder about the reasons that make the prices fluctuate. Many older people keep comparing the prices with what they paid years ago. They compare the price of a burger or a bag of flour and always complain about the rising prices.
It amazes everyone and this is a complicated topic for financial experts also. When there is a constant increase in demand due to growing population and the supply is also keeping up due to innovative methods of production and improved quality of production in every area from farming to manufacturing, then why should the prices of commodities increase constantly over the years?
Causes of inflation
If you want to understand the reasons behind inflation, then we need to explore how the economy works.
- The first reason is, of course, increased demand that cannot be fulfilled by the existing supply. It takes a little time for the supply to reach the level of demand.
- A sudden event can change the number of goods supplied in the market. For example, a natural calamity might damage the crops in an area and the prices of grains and other essentials may go up. But this should be a periodical change and the price may come back to the previous levels once the supply is stabilized.
- Sometimes the effect of one event may be carried forward and the built-in inflation may continue.
Inflation is difficult to get rid of
This is a vicious cycle. Once the inflation goes up then there are times when people stop buying certain things, this, in turn, may create an over-supply for some time. Then the people involved in their production suffer losses and may lose jobs or stop producing them. This may reduce the available money in a particular part of society.
On the other hand, when the demand goes up slowly even then the prices remain high and the working class people fight for higher wages as they are not able to afford the higher prices of essential goods. Big companies try to pass on the burden of production and high wages of employees to their customers through increased prices.
Sometimes the government policies may also affect the inflation at times of an emergency or war like situations the prices of goods may increase due to scarcity and more currency may be printed, which may compound the problem as seen in many countries. Thus we can see that there are myriad reasons and some are mentioned here. It affects the economy and a community and country at all levels.