3.

CAUSES OF INFLATION Inflation comes in different forms and those at are familiar withthe economic matters would observe that there are trends in theway that prices are moving gradual and

irregular in relation toaggregate sections of the economy. This suggest that there ismore than one factor that causes inflation and as different sections of the economy develop it gives rise to different typesinflationary

periods. The main causes of inflation are:

Demand-pull Inflation

Cost push Inflation

Monetary inflation

Structural inflation

Imported inflationDEMANDPULL INFLATIONDemand-

pull inflation occurs when the consumers, businesses or the governments demand for goods and services exceed thesupply; therefore the cost of the item rises, unless supply is perfectly elastic. Because we do not live in a perfect market supply is

somewhat inelastic and the supply of goods and servicescan only be increased if the factors of production are increased.The increase in demand is created from in increase in other areas,such as the supply of money, the increase of wages which would then give rise in

disposable income, and once the consumers havemore disposal income this would lead to aggregate spending. As a
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result of the aggregate spending there would also be an increasein demand for exports and

possible hoarding and profiteering from producers. The excessive demand, the prices of final goods and services would be forced to increase and this increase gives riseto inflation.COST-PUSH INFLATIONCost-push inflation is caused by an increase in production

costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs.When wages are increased, this causes the business owner to inturn increase the price of final goods and services which would be passed onto the consumers and the

same consumers are also theemployees. As a result of the increase in prices for final goods and services the employees realise that their income is insufficient tomeet their standard of living because the basic cost of living hasincreased. The trade unions then

act as the mediator for theemployees and negotiate better wages and conditions of employment. If the negotiations are successful and the employeesare given the requested wage increase this would further affect the prices of goods and services and

invariably affected.On the other hand, when firms attempt to increase their profit margins by making the prices more responsive to supply of a good or service instead of the demand for that said good or service.This is usually done regardless to the

state of the economy. Thiscan be seen in monopolistic economies where the firm is the only
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supplier or by entrepreneurs that are seeking a larger profit for their own self interests.MONETARY

INFLATIONMonetary inflation occurs when there is an excessive supply of money. It is understood that the government increases the money supply faster than the quantity of goods increases, which resultsin inflation. Interestingly as the supply of goods

increase themoney supply has to increase or else prices actually go down.When a dollar is worth less because the supply of dollars hasincreased, all businesses are forced to raise prices just to get thesame value for their products.STRUCTURA L INFLATIONPlanned

inflation that is caused by a government's monetary policy is called structural inflation. This type of inflation is not caused by the excess of demand or supply but is built into aneconomy due to the governments monetary policy.In developed countries

they are characterized by a lack of adequate resources like capital, foreign exchange, land and infrastructure. Furthermore, overpopulation with the majority depending on agriculture for their livelihood means that there is afragmentation of the land holdings.

There are other institutionalfactors like land-ownership, technological backwardness and lowrate of investment in agriculture. These features are typical of thedeveloping economies. For example, in developing country where

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the majority of the population live in the rural areas and depend on agriculture and the government implements a new industry,some people get employment outside the agricultural sector and settle down in

urban areas. Because there might be an unequaldistribution of land ownership and tenancy, technologicalbackwar dness and low rates of investments in agricultureinclusive of inadequate growth of the domestic supply of food which

corresponds with an increase in demand arising fromincreasing urbanization and population prices increase.Food being the key wage-good, an increase in its price tends toraise other prices as well. Therefore, some economists

consider food prices to be the major factor, which leads to inflation in thedeveloping economies.IMPORTED INFLATION Another type of inflation is imported inflation. This occurs whenthe inflation of goods and services from foreign countries that

areexperiencing inflation are imported and the increase in prices for that imported good or service will directly affect the cost of living. Another way imported inflation can add to our inflation rate iswhen overseas firms increase their prices and we pay more

for our goods increasing our own inflation.

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