Inflation is an economic term that refers to the generally rising prices of goods and services within a particular economy. It is the measurement of a hike in prices. When the general price level rises, each unit of currency buys fewer goods and services. Inflation is the rate at which the value of a currency is falling down and consequently, the prices of goods and services are rising. It often affects the buying capacity of consumers.
Causes of Inflation
Some factors cause inflation, below are a few of them:
Money Supply: Excess of the money supply is one of the causes of inflation. Money supply becomes the cause of inflation because when the circulation of money has been increased in a nation above the economic growth, therefore the value of the currency is reduced.
National Debt: Several factors influence national debt, which includes the money borrowing and spending of the country. If in a situation, the country’s debt is increased so it is left with two options. Either they increase the tax or print additional money to pay the debt. Thus the inflation increases.
Demand-Pull Effect: This factor states that in the growing economy where the wages increase, absolutely the people will have money to buy goods and services. Therefore there will be a huge demand. Thus the prices are increased so that there will be a decrease in demand and people will buy according to their needs. Therefore a balance is created and the thing is left for the other people. This is also a big cause of inflation.
Cost-Push Effect: This factor tells us that when any company buys the raw materials at a high cost, and they also have a high cost on wages they would have a loss or a decreased profit. Therefore the company does not want loss, so it will preserve its profitability bypassing the increased production cost to the end consumer in the form of increased prices.
Exchange Rates: An economy with exposure to foreign markets mostly functions based on the dollar value. For example, if Pakistan imports goods it has to pay in the dollar. But the currency of Pakistan is the rupee, which is converted into the dollar. So there should be a balance in the value of the dollar and rupee otherwise if the dollar has more value than of rupee then Pakistan has to pay more rather than the real cost. This is due to when the rupee is converted in dollars, For example, if $1 is equal to 160 rupees. And if Pakistan has to pay $10,000 for imports then it has to pay 1,600,000 rupees. Thus Pakistan is paying more for the goods because of the less value of the rupee against the dollar. Therefore the prices of goods are increased. And this finally increases inflation.
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