Definition

• Inflation is the sustained increase in the general price level of goods and services over a period. It reduces the purchasing power of money, meaning that with the same amount of money, you can buy fewer goods and services.

  
  

Demand-Pull Inflation

• Occurs when demand for goods and services exceeds supply.

• Example: More people want to buy a product, but there isn’t enough supply, so prices increase.

• Causes: Increased consumer spending, government stimulus, rising wages, or rapid economic growth.

Cost-Push Inflation

• Happens when the cost of production increases, leading businesses to charge higher prices.

• Example: If oil prices rise, transportation and manufacturing costs increase, pushing up overall prices.

• Causes: Supply chain disruptions, higher wages, increased raw material costs.

Built-In Inflation

• Also known as wage-price spiral.

• Workers demand higher wages → Businesses raise prices to cover costs → Leads to more wage demands.

• Example: If inflation rises by 5%, workers demand a 5% salary increase to maintain their purchasing power.

Monetary Inflation

• Occurs when the money supply grows faster than economic output.

• More money in circulation = Reduced value of money = Higher prices.

Formula