Causes of Inflation

Cost Push Inflation

When businesses respond to rising production costs, by raising prices in order to maintain their profit margins, cost push inflation occurs. There are many various reasons why costs might rise:

Rising imported raw materials costs caused by inflation occur in countries that are heavily dependent on exported goods

Rising labour costs are caused by the increase of wages which exceed improvement in productivity.  This cause is very important in industries which are labour-intensive. 

Higher indirect taxes imposed by the government  E.g. a rise in the taxes  on alcohol and cigarettes. These taxes are levied on producers  who depend on the price elasticity of demand and supply for their products. For example, if the government was to choose to add a new tax on car fuel, this would lead to a rise in cost-push inflation.

Demand Pull Inflation

 Demand pull inflation is the inflation resulting from an increase in aggregate demand is called demand-pull inflation. Aggregtate demand is the sum of all demand in an economy. The main aggregated demand that generate ongoing increases in aggregate demand are:

-Increases in the money supply

-Increases in government purchases

-Increases in the price level in the world