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Overview

Inflation is the name given to an increase in price levels generally. It is also manifest in the decline in the purchasing power of money

Inflation does not mean that the price of every good and service increases, but that on average the prices are rising.

Inflation reduces the value of money

Governments aim to control inflation because it reduces the value of money and the spending power of households, governments and firms.



Cost-push inflation occurs where the costs of factors of production rise regardless of whether or not they are in short supply.

Higher costs

Rises in costs may originate from a number of different sources, such as

Trade unions pushing up wages
Firms with monopoly power raising prices in order to increase their profits
Increases in international commodity prices
Increases in real material costs and fuel perhaps caused by a fall in the exchange rate can push up prices

Wage price spiral

Higher wages can cause a wage-price spiral. Workers gain a wage rise, which causes prices to increase, then workers seek higher wages to restore their real value and so on.

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Cost push inflation

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