what causes inflation?

Question

What would cause inflation? Monetary expansion or Monetary ppolicy controls?

Answer 1

That is one cause, certainly. Governments can definitely create inflation. And they do. They like inflation. It allows them to pay back loans with currency worth less than that which they borrowed. Heck, who would not like to do that if they could. Governments can.

There are other causes also. Demand is one. When consumer demand is extreme and supply is limited inflation is a result. The 2001-2004 housing boom is a prime example. Greenspan allowed people to borrow money for next to nothing and they rushed out and inflated the prices of realestate by incredible amounts. Limited production capabilites is another. When there is limited competition, you can bet your sweet booties that prices will increase. The cable TV market is a prime example of that. Nothing like a monopoly to limit competition and increase inflation. That concept also works with labor also. When the UAW had a grip on auto labor they drove up labor costs until they drove themselves into unemployement. I am certain there are other inflation causes also. One that comes to mind is free spending congress. Nothing like giving away tax payer money which they don't even have to increase inflation.

Answer 2

There are two types of inflation. Demand pull inflation caused by more people demanding less products that are in supply. This is caused when more added to payroll at a faster rate than economy can adjust to raising production level. Government combats this inflation through interest rates hikes.
The second is the cost push inflation due to the raise in costs due to input prices rising. This is a welfare killer and very lethal. Government combats it through 'automatic stabilising' where by they fix a tax equal the percentage of increase in price by the input suppliers.
Also there is the Cost of Living Allowence or COLA fixed to pay. So manufacturers won't raise prices because if the raise then they will have to pay COLA wage rise to its employees due to inflation picking up and this nuetrelises the gain they make by raising prices.
Both these form the inflation number though the first one is more prevelent since the second one is automatically stabilised in countries like USA.

Answer 3

One very simple answer--too much money chasing too few goods......Inflation always take place when the Democrats are in power and they turn the government money presses which make the newly printed money of lesser value--thus inflation!