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Causes of inflation and deflation

Economics notes

Causes of inflation and deflation

Inflation and deflation can have various causes. Demand-pull inflation occurs when aggregate demand exceeds the available supply of goods and services, leading to upward pressure on prices. Cost-push inflation occurs when the cost of production, such as wages or raw materials, increases and is passed on to consumers in the form of higher prices. Inflation expectations, monetary factors, and government policies can also influence inflationary pressures. Deflation, on the other hand, can be caused by weak demand, excess capacity, technological advancements that lower production costs, or tight monetary policy. Understanding the causes of inflation and deflation helps policymakers, businesses, and individuals anticipate price trends, assess the impact on purchasing power, and develop strategies to mitigate the effects of inflation or deflation.

What are the causes of inflation?

Causes of inflation can include increased demand, excessive money supply, cost-push factors, and expectations of future price increases.

How does demand-pull inflation occur?

Demand-pull inflation occurs when aggregate demand exceeds the economy's productive capacity, leading to increased prices due to excess demand for goods and services.

What are the consequences of deflation?

Consequences of deflation can include reduced consumer spending, increased debt burden, lower investment levels, decreased business profitability, and potential negative impacts on economic growth and employment.

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