The rate at which the prices of commodities and services in an economy are growing is known as inflation. As long as inflation continues, the prices of basic goods like food will rise and the society will struggle.
Price rises brought on by rising production costs, such as those for labour and raw materials, can result in inflation. As people are prepared to pay more for the product, due to an increase in demand for goods and services can lead to inflation. There are four main reasons why inflation occurs:-
1. Cost-push inflation
Cost-push inflation occurs when prices rise due to the increasing production costs, including labour and raw materials. Due to rising production costs, there is a drop in the supply of commodities while the demand for goods remains constant. As a result, consumers pay higher prices for the finished goods as a result of the increased production expenses.
2. Demand-Pull Inflation
A product or service that is in high demand among consumers may experience demand-pull inflation. Prices for a wide range of commodities tend to rise as demand for those goods surges across an economy. While short-term supply and demand imbalances are typically not a cause for concern, continuous demand can have an impact on the economy and drive up prices for other items, leading to demand-pull inflation.
3. Real Estate Sector
The housing market has had ups and downs over time. Home prices will increase if there is a demand for properties due to the economy's progress. The housing industry's supporting goods and services are likewise impacted by demand. The demand for building materials like steel and lumber, as well as the nails and rivets used in houses, may rise due to the increased demand for housing.
4. Fiscal Policy
Governments' expansive fiscal policies can raise the amount of disposable income available to both enterprises and consumers. Tax reductions allow businesses to invest in new projects, pay employees more, or hire more people. Additionally, consumers might buy more products. Government expenditure on infrastructure improvements is another way to boost the economy. The outcome might be a rise in the demand for goods and services, which would raise prices.
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