Well speaking in layman"s term Inflation is defined as the gradual increase in price of a commodity observed in long time intervals. It is the gradual increase in rates due to which prices increase annually. It should be noted that short term increase in price doesn"t count to inflation though. The basic reason of inflation is the presence of excess liquidity in the market which should be avoided during inflation. Now inflation can be caused predominantly due to two major factors: 1.Cost-Push Inflation 2.Demand-Pull Inflation 1. Cost-Push Inflation This type of inflation occurs when there is an increase in the cost of production of a commodity, which ultimately results in the overall price rise of that item in the market. The increase in cost of production can be due to various factors- 1.Wage Factors The trade unions may demand higher wages despite any significant improvement in the production efficiency or working time increased. This increased price due to the increased wages of the workers is reflected in the increased price of the commodity. 2.Increase in Price of Basic Materials Well there are several raw materials like steel, iron, cement, etc which are utilized almost in any industry. An increase in price of such basic commodities is reflected in the increased i price of the item being produced. 3.Increase in price of the Raw materials used in the industry Let us consider a hypothetical situation here, if there is an increase in price of leather, will the price of leather goods increase? Well, if the producer is profit oriented then definitely he"ll raise the level of pricing of such goods until the price comes back to normalcy at least. 4.Profit Oriented Leading Players If the leading or top producers of a commodity increase the price of an item in order to get more profit, then this trend is soon followed by all the other smaller producers in the market thereby resulting in increase n price of that particular item in the market. 2. Demand-Pull Inflation This type of inflation is the direct result of the classic law of demands. Demand-Pull Inflation occurs when there is more money and liquidity in the market (with the consumers) than the total quantity of a particular item. With large amounts of money present with the consumers chasing too little quantities the prices are bound to increase. But the problem lies in the fact that the consumers are willing to pay extra for such a product resulting in inflation. This has been normally observed whenever the demand exceeds the supply. The reverse of inflation is known as deflation, however such a thing is more of a theoretical concept than a reality. Inflation within 2-3% has been said to be good for the economy, because it results in decrease in the employment, increase in healthy competition and more profits. However, if inflation goes out of hand it can cause humongous problems for one and all. Inflation rates above 10% are known as Hyper Inflation. Large increase in inflation rates results in shifting of economies and the functioning of the world we know of.
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