5. Causes of Inflation

Inflation primarily occurs due to two sets of factors, the demand-pull factors and the cost-push factors. Both of them have been explained below in detail:

a) Demand Pull factors: These are those set of factors due to which there may be an increase in the demand of goods and services in the economy.

Some of them are:

(i) Increase in government expenditure: Increased government expenditure results in increased demand for goods and services and consequent increase in prices. This is because increased government expenditure results in putting large money in the hands of public, thereby putting to effect too much money chasing too few goods. And if the production capacity is not able to meet the increasing demand it results in inflation. The Government may also print new money to meet its expenditure, which has the highest effect on inflation of all the factors. This was the reason it was banned post the FRBMA Act 2003.

(ii) Rising population: Increasing population also acts as an important factor in pushing up prices because of increased demand especially when the supply is unable to meet the demand.

(iii) Black Money: A large part of the black money is used in buying and selling of real estate in urban areas, extensive hoarding and black marketing in essential wage goods, such as cereals, pulses, etc. Black money, therefore, fuels demands and leads to rise in prices.

(iv) Changing consumption patterns: One theory that was put forward by senior officials at the Reserve Bank of India (RBI) is that the inflation problem in India has its roots in a sharp increase in demand for certain food items that people eat more frequently as income rises. One example is protein-rich food. Increased consumption of pulses, eggs, fish and poultry were apparently driving up their prices in the economy.

(v) Increased wages: When the general wages increase, they have the effect of increasing demand in the economy because of increased money supply.