Wednesday, May 25, 2011

Causes of Inflation That The Whole world Is facing

Causes of Inflation That The Whole world Is facing
In simple words inflation means the rise in the general price level of goods and services in the economy over a period of time.It means when the general price level rises the power of the money buys fewer good and services.Inflation also reflects the erosion in the purchasing power of money. There are chief measure like, the inflation rate, the annualized percentage change in general price index over the time to measure the price inflation.Inflation affects the economy positively and negatively in the world.The negative effects of inflation are the decrease in the real value of money ant other monetary items over the time, uncertainty over the future inflation may discourage investment and saving & high inflation may lead to shortage of goods.Similarly, the positive effects of the inflation are central bank can adjust nominal interest rates and encourage investment in non-monetary capital projects.

In general, there are two basic causes of inflation the the whole world is facing, they are as follows.

Cost Push Inflation

Cost push inflation occurs when the business respond to the rise in the production cost,but raising prices in order to maintain their profit margins. There are so many ways under it, they are discussed bellow.
  • Rising the imported raw materials costs caused bu inflation in the country as well as in the whole world which are heavily dependable on export of these goods or alternatively by fall in the value of the dollar in the foreign exchange markets.
  • Rising the labour costs caused by the wage increases which exceed any improvement in the productivity.This cause is very important in causing inflation in the world.This is important in those industries that are labour intensive.The firm that decide not to pass the higher costs onto their customer but in the long run, wage inflation tends to move closely with price inflation because there are limits to extent to which any business can absorb higher wage expenses.
  • Higher indirect taxes imposed by the government- This is also an important cause to the inflation in the world.For example a rise in the rate of taxes in the alcohol and cigarette, a rise in the standard rate of value added tax, an increase in the fuel duties and an extension to the range of the product to which VAT is applied.These taxes are levied those producers who depending on the price elasticity of demand and supply for the product, can opt to pass on the burden of the tax onto customers.If the government want to levy a new tax on aviation fuel, then this would contribute to a rise in cost push inflation.
These are the cost push inflation causes the whole world is facing in the present condition.

Demand Pull Inflation

The another cause of inflation the the whole world is facing, is demand pull inflation.It is possible when there is full employment of resources and when SRAS is inelastic.In these case an increase in the Ad may lead to increase in the prices.Under this demand pull inflation there are some points that cause the inflation, they are as follows.
  • A depreciation of the exchange rate- It has the effect in the rise of the price of imports and it also reduces the foreign price of UK exports especially.If the customers by the less imports while the foreigners buy more exports then AD will increase.Similarly if the economy of the country is at the full of the employment then prices are pulled upwards.
  • A reduction in the direct or indirect taxation-Consumer have more disposal income causing demand to rise, if the direct taxes are reduced.A reduction in the direct means that the volume of the income will increase or consumers can buy more volume of goods and services.So the both factors can take aggregate demand and real GDP higher .So it may causes the inflation in the whole world.
  • The rapid growth of the money supply- The another cause of the inflation is the rapidly growth in the supply of money.If the interest rate is low then the people may borrow the more money from the banking and financial institutions.Then consumer have more monetary power.Monetarists econoCauses of Inflation That The Whole world Is facingmists believe that the root causes of the inflation are monetary in particular when the monetary authorities permit an excessive growth of the supply of money in circulation beyond that needed to finance the volume of transaction produced in the economy.Thus inflation causes.
  • The another reason of the inflation in the world is the rising consumer confidence and increase in the rate of growth of houses prices. Because The both lead to an increase in the total household demand for goods and services. As a result inflation appears in the markets and gradually in the whole world.
These are the main causes of the inflation that cause the inflation not only in the particular country but also in the whole world.


Post a Comment