Causes of Inflation

By Amna Saghir 12-CS-12

Causes of inflation

1.Demand pull

2.Cost Push

3.Expansion of money supply

Demand pullDemand-pull inflation occurs when demand for a good

or service increases so much that it outstrips supply.

As demand increases, sellers start selling out of the product, and frustrate potential customers. Their next

step would be to produce more.However, if supply is constrained, their next step would be to raise prices, creating inflation. Therefore, for an increase in demand to cause inflation, there must be a

supply constraint, otherwise supply would simply rise to meet demand.

Example 1In early 1970s, the Organization of Petroleum Exporting Counties (OPEC)

took steps to decrease global oil supply. During the period there was no extraordinary increase in the volume of consumption, but the prices still surged.

Example 2:In 2012, severe floods hit the Punjab and Sind provinces of Pakistan wiping away crops, shutting down refineries, killing cattle and creating widespread disruption in supplies.

Demand Pull

Black Money

Disposable

Income

Non-productive

Expenditures

Population

increase

Black MoneyThe money which is earned through an

illegal way.

Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume.

The money which is earned through an illegal way.

Disposable Income

i

the money a person has available to spend after paying taxes, pension contributions, etc

the total amount of money that the individuals in a community, country, etc, have available to buy consumer goods

Non-productive Expenditures

Government of Pakistan has to make a lot of non-productive expenditures like defence etc. Such

unproductive expenditures lead to the wastage of economy’s precious resources and also lead to

inflation.

Cost-push Inflation

Cost-push inflation is when a shortage of supply of labor, raw materials or capital drives

up prices. The demand remains the same, but since there are fewer goods or services,

the supplier can charge more per unit.

Example 1:if the storm destroy the generators, it’s demand

will increases in the market for a limited time until free market had an opportunity to work more generators would be shipped in from other areas and prices would return to normal.

Example 2:In the aftermath of the 2008 financial crisis, there

was inflation in two asset classes, gold and oil prices, with deflation in two others -- housing prices and personal income.

Example 1:if the storm destroy the generators, it’s demand

will increases in the market for a limited time until free market had an opportunity to work more generators would be shipped in from other areas and prices would return to normal.

Example 2:In the aftermath of the 2008 financial crisis,

there was inflation in two asset classes, gold and oil prices, with deflation in two others -- housing prices and personal income.

Cost Push

Wages Taxes Raw

MaterialProfit

Margin

WagesWages are one of the main costs

facing firms. Rising wages will push up prices as firms have to pay higher costs (higher wages may also cause rising demand)

Wages

More MoneyUnlimited Wants

Less MoneyLimited Wants

TaxesWhat is Tax?

The profit which government gain from the people.

It may be from the cash you earn or the product you buy.

You have to pay to your government for the facilities you are getting

Types of Taxes In PakistanDirect Taxes

>Salaries>Interest on securities;>Income from property;>Income from business >Capital gains>Income from other sources

Personal Tax>rates rending from 10 to 35 per cent.

Tax on Companies>Sale tax>Income tax

Raw materialAs the prices of raw material inreases the price of

product depending on them increases and this cause the inflation in the society.

Similarly in 2005-2008 the prices of oil increases which increases the inflation in the society as it effect on different fields.

Profit MarginThe profit margin is an accounting measure designed to gauge the financial health of a

business or industry

it is defined as the ratio of profits earned to total sales receipts (or costs) over some defined period

Greedy people of society wants more and more money.

They don’t care for the people and their needs.

They earn from the needs of people

Expansion of the Money Supply

The money supply is not just cash, but also credit, loans and mortgages.

When loans are cheap, then there will be too much money chasing too few goods, creating inflation. The prices of just about everything will increase, even though neither demand nor supply has changed.