Causes of inflation .. and the contributing factors to its occurrence!

 Inflation is a financial, economic and social phenomenon whose emergence is related to a number of factors. Here is everything you need to know about the causes of inflation.

 Inflation is used as a measure of the rate at which the prices of goods and services rise in an economy. Inflation, if it occurs, results in an increase in the prices of daily necessities such as food products and this may result in severe social damages. Not only food products, but inflation can occur in any product or service such as housing, health care or even cosmetics. If inflation prevails in all areas of the sector, then concern grows about whether further inflation is a possibility for consumers and businesses alike.

 Inflation can be a major concern for consumers and businesses alike, because it makes money saved today less valuable tomorrow and erodes consumers' purchasing power in a way that affects retirement. For example, if the investor earned 5% of the investment in stocks and bonds, but the inflation rate was 3%, the investor would have earned only 2% of the real value.

 Read on to learn about the most important causes of inflation and the factors contributing to its occurrence.

 What are the causes of inflation?

 There are many factors that can lead to higher prices and thus the emergence of inflation in the economy. Inflation usually results from several reasons, the most important of which are high production costs or an increase in the level of demand for products and services, in addition to the demand for the housing sector and expansionary fiscal policies.[1]

 high production costs

 The rise in production costs is one of the most important causes of inflation. In this case, inflation occurs when prices rise due to increases in production costs such as raw materials and wages, in a way that does not change the level of demand for goods and reduces the supply. As a result, additional production costs are passed on to consumers in the form of increases in commodity prices. One sign of this form of inflation can be seen in the rise in the prices of commodities such as oil and minerals as they are major production inputs.

 For example, if the price of copper increases, companies that use copper to make their products may increase the prices of their goods. If the demand for the product is independent of the demand for copper, the company will pass on the higher costs of raw materials to consumers. The result is higher prices for consumers without any change in the demand for the products consumed. Wages also affect the cost of production, and wages usually constitute the single largest account of firms. When the economy is doing well and the unemployment rate is low, there can be a shortage of labor or workers. Firms in turn increase wages to attract qualified candidates and this leads to higher costs of production for the firm. If the company raises prices due to higher employee wages, higher production costs are inflated. Natural disasters can also drive up prices. If, for example, a hurricane destroys a crop like corn, then prices can rise in a wide variety of materials and sectors because corn is used in many of them.

 high demand

 High demand is also one of the main causes of inflation. Inflation can occur due to a high level of strong consumer demand for a product or service. When there is an increase in demand for a wide range of goods across the economy, their prices tend to rise. While this is often not a real concern for short-term imbalances between supply and demand, persistent demand can echo through the economy and raise the costs of other goods. The result, the occurrence of inflation in demand. Consumer confidence tends to rise when unemployment is low and wages are high, as this leads to increased spending. Because economic expansion has a direct impact on the level of consumer spending in the economy, this may lead to an increase in demand for products and services.

 As the demand for a particular good or service increases, the available supply decreases. When fewer items are available, consumers are willing to pay more to get the item they want as outlined in the economic principle of supply and demand. The result is higher prices due to inflated demand and attraction. Companies also play an important role in the emergence of inflation, especially if they are making popular products. The company can raise prices just because consumers are willing to pay the increased amount. Companies also freely raise prices when an item for sale is something consumers need for everyday life, such as oil and gas. However, it is constant and stable demand from consumers that provides companies with this leverage to raise prices.

 The demand for the housing sector

 Over the years, the housing market has seen various upward and downward movements. If the demand for homes increases, because the economy is expanding, then home prices will rise as a result. This high demand affects the additional products and services that support the housing industry as well, as construction products such as lumber, steel and nails used in homes may see a rise in demand as a result of the high demand for homes.

 expansionary fiscal policies

 Expansive fiscal policies put in place by governments can increase the amount of discretionary income for both businesses and consumers. If the government cuts taxes, companies might spend it on improving capital, compensating employees, or making new hires. Then consumers can buy more goods as well. The government can also stimulate the economy by increasing spending on infrastructure projects. The result of this, on the other hand, can be an increase in the demand for goods and services which will lead to higher prices and inflation.

 Now that we know the most important causes of inflation, let's move on to learn how to measure inflation and who benefits from it.

 How to measure inflation

 There are a few metrics used to measure inflation. The most famous of these is the Consumer Price Index (CPI), which measures the prices of a basket of goods and services in the economy, including food products, automobiles, education, and entertainment. In October 2021, the CPI rose 0.9% on a seasonal basis. Compared to the previous year, the full index is up 6.2%, making it the largest annual increase since 1990.

 The Producer Price Index (PPI) is another measure of inflation. This indicator shows price changes that affect domestic producers. The Producer Price Index measures the prices of fuels, agricultural products (meat and grains), chemical products, and minerals. If the price rises in such a way that the producer price index is transmitted to the consumers, this will be reflected in the consumer price index.

 What is the beneficiary of inflation?

 Consumers generally do not benefit from inflation, but investors from them can enjoy some upside if they own assets in inflation-affected markets. For example, those who invest in energy companies may benefit from a rise in their stock prices if energy prices are rising.

 On the other hand, some firms reap the fruits of inflation if they can charge higher fees on their products as a result of increased demand for their goods. If the economy is doing well and housing demand is high, home builders can charge higher prices to sell homes. In other words, inflation can provide companies with pricing power and increase their profit margins. If profit margins rise, this means that the prices companies charge for their products are increasing at a faster rate than increases in production costs.

 Business owners can also deliberately withhold supplies from the market as this will allow prices to rise to an appropriate level. However, companies can also be hit by inflation if it is a result of higher production costs. Firms are at risk if they cannot pass on higher costs to consumers through higher prices. If foreign competition is not affected, for example, by an increase in the cost of production, its prices do not need to rise. As a result, domestic companies may have to take up higher production costs or else they risk losing customers to foreign competitors.

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