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Causes of Inflation

Inflation is the result of two sets of factors:

Cost-Push Inflation

Cost-push inflation basically means that prices have been "pushed up" or increased by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship).
(Aggregate supply is the total volume of goods and services produced by an economy at a given price level.) When there is a decrease in the aggregate supply of goods and services due to an increase in the cost of production, we have cost-push inflation. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).

Demand Pull Inflation

A situation where the demand for goods and services rises faster than the supply of goods and services. This excess demand increases the prices of the goods and services hence creating inflation. Can be simply said as “Too much money chasing too few goods”. Some factors that cause this demand pull inflations are excessive foreign investment, expansionary fiscal policy e.g. increase in government expenditure), expansionary monetary policy (e.g. Increase in money supply), easy access to credit, deficit financing and others.

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