Factors Responsible For Increasing Inflation Day by Day
Inflation, an increase in the prices of goods and services, erodes a consumer's purchasing power.
In order to maintain a healthy economic environment, inflation should be kept to a minimum.
Inflation is caused by many different factors, and it affects everyone in the economy. Let's look at some of them:
1. Increased Demand
An increase in demand means that people buy more of a good or service. The determinants of demand are consumer income, buyers’ tastes or preferences, and their expectations about whether the price will go up.
Increasing demand can also be caused by changes in prices of related goods or by changes in the size of the population. For instance, a society that has more children will have higher demand for clothing and child care.
Another determinant of demand is the price of substitutes. This is the cost of products that consumers would otherwise purchase but for which there are cheaper substitutes available.
Increased demand for goods and services can lead to inflation if businesses cannot pass the increased costs onto consumers through their prices. This is called cost-push inflation.
2. Increased Supply
Inflation occurs when prices rise in an economy. Inflation is caused by a number of factors, including demand-pull and cost-push conditions.
When production costs increase, companies are unable to pass on those increases to consumers and will have to raise their prices accordingly. Often, this is a good thing because it means that competitors will have to raise their prices as well.
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However, it can also be bad for businesses, especially U.S. ones, if foreign competition is unaffected by the production cost increase.
Inflation can be a difficult problem to manage, particularly when merchants are under pressure from both suppliers and competitors. But there are steps companies can take to rebuild their price-negotiation capabilities.
3. Increased Prices
Inflation is the general increase in prices that can be seen across the economy. This generally results in a decrease in the purchasing power of your money, which means that you won’t be able to buy as many things as you used to be able to.
In order to avoid a dreaded cyclical downturn, inflation is usually managed through policies like interest rates, cuts in taxes, or other economic measures that help keep prices in check.
Inflation is often caused by two main factors: demand-pull and cost-push. The latter is caused by changes in production costs and supply constraints.
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4. Increased Taxes
The most well-known factor responsible for inreasing inflation day by day is increased taxes. This is because, as taxes increase, individuals are left with less money in their pockets and are able to spend fewer goods and services.
This decrease in disposable income, together with the multiplier, means that the overall level of consumption reduces and, as a result, puts downward pressures on prices and wages.
As a result, public finance experts have generally concluded that reducing inflation through tax increases is a more effective way to deal with deflationary fiscal pressures than by cutting expenditures.
As businesses and households face higher taxes, they may be forced to cut back on spending and invest in other ways — such as increasing wages or investing in new technologies. This can be a positive economic development. However, it can also lead to a rise in unemployment and lower economic growth.
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