What Causes Inflation? I Term of the Week I

📊 Term of the Week 📊 What causes Inflation?
Demand-Pull and Cost-Push factors can cause an increase in Inflation
.🔘Demand-Pull Inflation: When an economy's production capacity cannot keep up with rising consumer demand.
🔘Cost-Push Inflation: When an economy's aggregate supply decreases because of an increase in production costs.

0:04 to 1:30 Introduction
We discussed how inflation is calculated last week but now let's understand what causes a rise in the general price level. Broadly, inflation can be caused by two main factors: Demand-pull and cost-push. Demand-pull inflation occurs when an economy's production capacity cannot keep up with rising consumer demand. Cost-push inflation occurs when an economy's aggregate supply decreases because of an increase in production costs.

1:30 to 2:22 Demand-Pull Inflation
As a consumption driven economy, our consumer demand has been on the rise. This is driven by both population growth rate, with more mouths to feed, and a tendency to spend more on higher value goods to improve quality of life. As demand for goods and services in the entire country, known as aggregate demand, rises, prices go up. Note that this will mostly be the case if there is no excess supply in the economy to provide those goods. If the country is productive and can cater to the needs of the people, demand-pull inflation will remain relatively low.

2:23 to 3:09 Cost-Push Inflation
If the government increases the minimum support price on wheat to help farmers, the costs for the flour producer go up. This will lead to inflation. If the government increases electricity tariffs because of public misadministration, it will hurt consumers and lead to inflation. If the international price of oil goes up because there is a global supply shock and the government transfers this increase on to consumers, inflation will go up. Inflation caused by these supply-side factors is known as cost-push inflation.

3:09 to 4:08
SBP autonomyLast week, we mentioned it is important to understand what inflation means for the economy since we are moving toward SBP autonomy and inflation-targeting. However, it is also important to understand what kind of inflation SBP can control. SBP has limited control over cost-push factors but can change money supply and interest rates to affect demand-pull inflation.

#inflation #Pakistan #economy

[zeezahid]

Precise and everything we want to learn!
Couldnt be more happier!

[JalalKZulfiqar]

Good one but should have mentionned a bit more about the role of government and what they can do to potentially curb inflation and what is not in their domain. In Pakistan people start assuming that the PM has kind of switched on inflation and if he wanted he could switch it off :D

[maheengul]

If interest rate is increased cost of borrowing will increase and which will cause increase in cost of production
This will lead to increase in inflation right ?
But if we see from a macro perspective increase in interest rate cause demand to decrease which is eventually used as a tool to control inflation
So is this a cycle or one should only keep the later effect in mind ?