Cost-push inflation
This occurs when
prices of goods rise due to production cost increases. This could be caused by higher wages and more expensive raw materials like iron ore, wood or silver. The demand for these goods remains the same, but the supply will decline and cost more to manufacture, thus pushing up prices for consumers.
Natural disasters
Natural disasters like severe droughts, hurricanes or volcanoes could also drive up prices. For example, if the wheat crop of a major wheat producer is destroyed due to extreme drought, then all wheat-based products will increase in price as there is a production shortage.
Demand-pull inflation
This is when
consumers have a high demand for a product or a service. When there is low unemployment, and consumer’s wages increase, they spend more. This increased spending leads to a higher demand for goods and services, which could lead to shortages. Consumers are willing to pay more to obtain these goods and services, and prices go up.
Buit-in Inflation and rising wages
Employees have gotten used to the rising cost of living in modern times. As a result, they anticipate the rise in inflation and demand higher salaries to maintain their standard of living. This increases production costs for companies, which could push up the prices of goods and services. The rise in wages means more disposable income for consumers and a higher demand for goods as they spend this disposable income, resulting in even higher prices. It’s like a vicious circle that will ultimately bring on higher inflation.
Monetary devaluation
Inflation can be caused by too much money in the economy. Money has a certain value, and like supply and demand, if there is too much money floating around, then the value of money drops (a surplus makes things cheaper while a shortage makes it worth more; for example, diamonds are valuable because they are rare, if suddenly there was a surplus of diamonds, then prices would drop because they are not as rare and valuable anymore).
Also, monetary value is dependent on the confidence and trust that is held in the issuer of the currency. The US dollar, Pound Sterling and Euro are strong currencies held by solid economies, while the Venezuelan bolivar is practically worthless and suffers from
hyperinflation at 400% inflation. The ECB targets annual inflation to be 2%.
