The Causes of Inflation
- Inflation can arise from both the demand side and the supply side
- Demand pull inflation is when increases in the price level are caused by increases in aggregate demand
- When the economy is producing at or near its potential, an increase in AD will increase the price level
- Cost push inflation is when increases in the price level are caused by increases in the costs of production
- This is commonly caused by wage rates rising above the rise of the costs of production
- It can also be caused by the rise in the cost of raw materials
- g. the rise in the price of oil will push up the cost of fuel, which will increase the costs of distributing products, etc.