Monetarists argue that if the Money Supply rises faster than the rate of growth of national income, then there will be inflation.

When prices soar over 50% in one month, the economy is experiencing hyperinflation. This is often caused by a government that prints more money than its nation’s GDP can support. Hyperinflation tends to occur during a period of economic turmoil or depression. Demand-pull inflation can also cause hyperinflation.

In economics, the demand-pull theory is the theory that inflation occurs when demand for goods and services exceeds existing supplies.

The market power theory of inflation represents one extreme end of inflation. According to this theory inflation exists even when there is no excess in demand. On the other end, the conventional demand-pull theorists believed that the only cause of inflation is the excess of aggregate demand over aggregate supply.

Specifically, they distinguish between two broad types of inflation: cost-push inflation and demand-pull inflation.

• Cost-push inflation results from general increases in the costs of the factors of production.
• Demand-pull inflation results from an excess of aggregate demand relative to aggregate supply.

Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

Increase in public spending, hoarding, tax reductions, price rise in international markets are the causes of inflation. These factors lead to rising prices. Also, increasing demands causes higher prices which leads to Inflation.

These include real estate, commodities, and certain types of stocks and bonds. Commodities include items like oil, cotton, soybeans, and orange juice. Like gold, the price of oil moves with inflation. Other commodities also tend to increase in price when inflation rises.

When inflation hits, money market funds are interest-bearing investments, and that’s where you need to have your cash parked. Still another alternative is Treasury Inflation-Protected Securities, or TIPS, issued by the U.S. Treasury. You can buy these online through Treasury Direct in denominations as small as $100.

High inflation puts pressure on a government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher. Inflation expectations and wage demands: This can lead to a rise in unit labour costs and lower profits for businesses.

Key Takeaways Economists believe inflation comes about when the supply of money is greater than the demand for money. Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth.

High inflation tends to lower the share of the bottom quintile and the real minimum wage – and tends to increase poverty.

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (AD) (economic growth too fast) or cost push factors (supply-side factors).

Cost-push inflation is when supply costs rise or supply levels fall. Either will drive up prices as long as demand remains the same. Shortages or cost increases in labor, raw materials, and capital goods create cost-push inflation.

Definition: Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.

The most common cause of cost-push inflation starts with an increase in the cost of production, which may be expected or unexpected. For example, the cost of raw materials or inventory used in production might increase, leading to higher costs.

Policies to reduce cost-push inflation are essentially the same as policies to reduce demand-pull inflation. The government could pursue deflationary fiscal policy (higher taxes, lower spending) or monetary authorities could increase interest rates.

Demand-pull inflation results when prices rise because aggregate demand in an economy is greater than aggregate supply. Cost-push inflation is a result of increased production costs, such as wages and raw materials and decreased aggregate supply.