Causes of Inflation

Thinking in terms of supply and demand, price inflation could be caused in one or both of two ways. Prices in general would only rise if, on the average, demand increases or supply decreases. In the first case, when demand increases and this results in inflation, we describe it as demand pull inflation. On the other hand, when cost increases and this causes supply to decrease in turn, and this results in inflation, we describe it as cost push inflation. But these two different causes of inflation are not independent, of course. A demand-pull inflation may itself lead to cost increases, which then give rise to a further cost-push inflation. This sort of vicious circle could account for the persistence of inflation in the latter half of the twentieth century, and many economists believe that it does.

Inflation as a Problem