Why does inflation exist?

Question

Is it because central banks issue money faster than the population increases? This seems like it should be the cause, but I don't know.

Answer 1

Partly, but not entirely. For the price level to remain steady (i.e. zero inflation), the quantity of money in circulation has to increase at the same rate as the real increase in economic output. Part of this increase in economic output is due to population increase but productivity improvements are just as important. Any increase in the supply of money over and above this contributes to inflation. Due to the fact that the central bank doesn't have 100% control over the amount of money in circulation, fluctuations in inflation expectations and savings preferences also affect inflation in the short term.

Answer 2

Inflation is a vicious cycle that is almost impossible to stop once it begins.

Let's look at the supply side.

Let's say that in one particular industry, say food production, there is a scarcity of a particular raw material and consequently it elevates their cost of production. That means that the companies that produce these items will have sell them more expensive to consumers. Consumers have to pay more. But my salary doesn't increase automatically in order to adjust to the shift in prices. So that means that the monetary supply remain constant. The result is that the price goes up. But at the same time, most products are linked to one another, so an increase in one will affect others, and so forth.

From the demand side, let's say that the stock market is doing so well and investors have made million upon millions. This means that companies, and subsequently families, have a lot more disposable income. So what are you going to? Spend it. Spending increase the monetary supply and consequently drives prices up because companies realize that there is more money available to consumers, so they jack up prices. On the other hand, let's suppose scarcity of one particular product, like oil. Investors are so worried about guaranteeing supply that they;ll basically pay anything to ensure the delivery of existing inventories. So in the end, we have inflation. Even worse, it spreads like a cancer throughout your whole country's economy.

As you can see, we only looked at a couple of things in general. We didn;t really touch down on anything, but if you want to go more in depth, then there are many, many other possibilities by which inflation can just skyrocket.

Answer 3

That certainly is one possibility, but look at it from a growth perspective.

Nearly all economies experience some sort of positive growth over the long run (not absolutely true, but nearly all). This growth puts more money in the hands of consumers, who have more money to spend. This allows firms to slightly increase prices.

So currently we have income rising, and prices rising as well.
Again, in most countries, competition and increased productivity will keep the prices from outpacing rising income, which results in real growth.

A small amount of inflation is typically healthy for an economy.

Answer 4

It is exactly the cause of inflation. As central banks issue money "on the full faith and credit" of their countries, more money flows into the marketplace, making it of less and less value.

In all places, inflation tends to help debtors, because they owe only a certain portion of money and more money in the system helps them pay their debt back to the banks.

Answer 5

Inflation is all about expectations and money... You're right. Is always a monetary issue.
Beware... inflation isn't always bad. Economists today agree that a controlled low inflation is desirable.

Answer 6

Because of paper money. Paper continues to increase but goods and services may not. It depends on things like producitivity.

Answer 7

Because of pure greed!

Answer 8

because of inbalance of demand and supply.