What are the primary causes of inflation?


Answer: In economics, inflation is the growth rate of the price of goods and services for a particular selection of items. For example, items that a typical household consumes are captured in the Consumer Price Index, whereas items that domestic producers buy are included in the Producer Price Index. The drivers behind changes in the general price levels can be attributed to two main reasons. First, changes in the real demand and supply of goods and services will drive prices up or down. Higher prices will encourage suppliers to increase supply and discourage consumer demand reestablishing market equilibrium. Second, changes in the money supply –i.e. the amount of currency in circulation, bank deposits, and other liquid monetary aggregates– can lead to inflation. When a country's central bank decides to increase the money supply through quantitative easing monetary policies, the amount of currency available to buy and sell the same amount of goods and services increases. If the rate at which money is exchanged in an economy remains unchanged (i.e. velocity of money is constant) then a higher money supply will lead to higher prices because there is more money to transact the same amount of goods and services in the economy.