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Monetary Policy - Inflation - Causes
Theories
Inflation can be caused by a variety of different factors, and for each factor there are several different theoretical explanations! Here we look at some of these theories about the causes of inflation. Follow the links below to get more detail about the particular theory.
- Demand-pull inflation - demand-pull inflation happens where there is 'too much money chasing too few goods'. Excessive growth in demand literally pulls prices up.
- Cost-push inflation - if costs rise too fast, companies will need to put prices up to maintain their margins. This will cause inflation.
- Quantity theory of money - excessive money supply growth can also be a cause of inflation. The quantity theory of money explains why this happens.
- Phillips curve - there is often considered to be a trade-off between unemployment and inflation. The Phillips curve shows this relationship.
- Price expectations and inflation - there is a definite link between people's price expectations and the level of inflation, but there is a lot of debate among economists on the exact nature of the link!
- Wage-price spiral - cost-push and demand-pull inflation can interact to cause a wage-price spiral.
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