2.0 2.

The Causes of Inflation Demand-pull inflation Demand-pull inflation is the most common. This is basically when the aggregate

demand in an economy exceeds the aggregate supply. It is also defined as `too much money chasing too few goods. Bare-boned, it means that a country is capable of producing only 100 items but the demand is for 105 items. Its a very simple demandsupply issue. The more demand there is, the costlier it becomes. Much the same as the way real estate in the country is rising. The first is a growing economy. When families feel confident that they will get raises and better jobs, that their homes and other investments will increase in value, and that the government is doing the right thing in guiding the economy, they will spend more instead of saving. They will also borrow more, either with auto or home loans, or credit cards. If they don't borrow too much, this is actually a healthy cause of inflation. It creates gradual and steady price increases. 2.2 Cost-Push Inflation A second cause of inflation is cost-push inflation, which occurs when there is a supply shock. This represents the condition where, even though there is no increase in aggregate demand, but since there are fewer goods or services, the supplier can charge more per unit. Non availability of a commodity would lead to increase in prices. This may happen if the costs of especially wage cost rise. Wage inflation is another example of cost-push inflation. This is when wage earners have the power to force through wage increases, which companies then pass through to consumers in higher prices. This happened in the U.S. auto industry, when the labor unions were able to push for higher wages. Thanks to China and the decline of union power in the U.S., this has not been a driver of inflation for many years. Cost-push inflation also occurs when companies achieve a monopoly over an industry. This has the same effect as reducing the supply, because the company controls the supply of that good or service. In fact, OPEC's goal was to achieve monopoly power over oil. As long as the oil-exporting countries competed with each other on price, they

could not receive what they thought was a reasonable value for a non-renewable natural resource. Natural disasters can create cost-push inflation. This happened right after Japan's earthquake, which disrupted the supply of auto parts. It also occurred after Hurricane Katrina, when oil refineries were destroyed, causing gas prices to skyrocket. A growing problem will be cost-push inflation as a result of the depletion of natural resources. Each year the price of many types of fish gets higher, thanks to overfishing. The U.S. has recently enacted laws to restrict fisherman to prevent overfishing. However, this still leads to cost-push inflation as it reduces the supply of fish. Government regulation and taxation can reduce supplies of many other products. Taxes on cigarettes and alcohol were meant to lower demand for these unhealthy products. This may have happened, but more important it raised the price, creating inflation. Government subsidies of ethanol production led to inflation in food prices in 2008. That's because agribusiness grew corn for energy production, taking it out of the food supply. Food prices were so high that there were food riots around the world that year. 2.3 Imported Inflation This is inflation due to increases in the prices of imports. Increases in the prices of imported final products directly affect any expenditure-based measure of inflation. They play an important role in driving the rise in domestic prices. The rise in the global prices of crude oil and agricultural commodities, including food grains, and industrial products, and setbacks to global economy resulting from sub-prime mortgage disaster and US recession have contributed to Indias inflation.