Inflation is a consistent increase in the price of goods and services over a period. There are various factors that cause inflation. One such factor is the demand for a product. Inflation can occur when the consumer demand for a product is strong. This type of inflation is known as demand-pull inflation. When demand for a broad range of items increases in an economy, their prices will likely rise. Short-run abnormalities in demand and supply may not influence prices. However, if sustained demand persists, it can affect the larger economy, leading to an increase in the prices of other goods.
Consumer confidence is typically high when remuneration is increasing and unemployment is low, resulting in increased spending. When the demand for a certain commodity or service goes up, the supply falls. Hence, the good or service is less available, leading to customers' willingness to pay more to get it. As a result of this increased demand, demand-pull inflation occurs, and prices rise.
Companies also contribute to demand-pull inflation, particularly if they produce popular products. A business can increase its prices merely because consumers don't mind paying more. Companies could also freely increase the prices of goods and items that people require for everyday living. Nonetheless, even though companies encourage inflation, consumer demand is still the underlying factor because it grants the companies leverage to increase prices.
Apart from a sustained increase in demand, a rise in production costs can also lead to inflation. This type of inflation is known as cost-push inflation. Factors such as raw materials and wages paid to laborers are essential to the production process, and if their cost goes up, the prices of the finished goods and services are also likely to increase. Demand for commodities remains stable, while supply decreases as production costs rise. As a result, the increased production costs are diverted to customers in the form of more expensive finished goods.
One indicator of cost-push inflation is an increase in the price of commodities, such as metals and oil, which are critical manufacturing inputs. For instance, if the price of aluminum increases, businesses that rely on the metal to manufacture their products may increase their prices. If the product's demand is not reliant on aluminum demand, the company will make customers pay for the increased raw material costs. As a result, customers face greater prices without a higher demand for goods consumed.
Wages paid to workers are often a business's largest expense, and a key factor in determining the cost of production. In a thriving economy where the rate of unemployment is low, labor or worker shortages are possible. In such situations, companies increase labor wages to draw the attention of qualified candidates, increasing the company's production costs. When a business increases prices in response to an increase in employee wages, the result is cost-push inflation.
Natural disasters can also play a part in cost-push inflation. For instance, if a tsunami destroys a crop like corn, prices are likely to go up throughout the economy because maize is used to produce a range of goods.
In addition to demand-pull and cost-push, inflation can be caused by increased demand for homes and other real estate. The property market has seen many highs and lows in the past. If demand for homes increases due to an economic expansion, housing prices will go up. The demand will also cause a rise in the price of ancillary goods and services supporting the housing sector. Again, a rise in the demand for homes will instigate an increase in the demand for construction products like wood and the many other products utilized in houses.