Causes of inflation

The causes of inflation are:
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• Demand-pull inflation
• Cost-push inflation
• Imported inflation
• inflationary expectations
• Other causes:
  • Government policies
    • (e.g. 1: increased GST → increased prices → Cost-push inflation)
    • (e.g. 2: increased regulation/protection (Tariffs/Quotas) → higher prices → Cost-push inflation)
  • Excessive increases in the money supply
    • (a.k.a. ‘monetary inflation’)
    • (increases in $ supply at rates faster than economic growth → pushing up prices)

Demand-pull inflation

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• When demand exceeds the available supply, resources become scarce and ==prices rise in the short-term==.
• caused by any increase in AD.
  • can include higher levels of consumer spending and investment
• 
  • D: AD
  • S: AS

Cost-push inflation

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• When production costs increase, firms must also raise prices to cover these costs

  • can be caused by increased price of wages, rent, suppliers, or other business inputs

• 

  • D: AD
  • S: AS

• common cause is ==increased wage pressures==, can cause a cycle of:

  • raised prices to cover wage increases
  • consumers (who also form the labour market) demanding higher wages to pay for increased cost of living

Imported inflation

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• Imported inflation is transferred to Australia through international transactions
• an increase in the price of imported goods
  (perhaps caused by a depreciation of the AUD)
  • → Australia pays higher prices for imports
  • → flows through to the official (domestic) inflation rate

inflationary expectations

• If individuals expect prices (inflation) to rise in the future, they can act in ways that increase inflation:
  ?

1. consumers increase spending while prices are lower
   • → causing Demand-pull inflation
   • similarly, firms will increase their prices if demand is expected to rise (for profit) → more inflation
2. employees will negotiate wage increases in preparation for future inflation
   • → increasing costs of production by firms (Cost-push inflation)