WHAT ARE THE CAUSES OF INFLATION? INCREASE IN DEMAND? DECLINE IN SUPPLY?

There are several causes of inflation namely:

1.   Excessive money supply caused by ineffective monetary and fiscal policy.

2.   Fall in the supply of goods and services especially agricultural product causing in demand and price as well

3.   Budget deficit of government expenditure programmes is major causes of inflation in developing nations.

4.   Too much importation of goods and services can cause inflation especially in developing nations

5.   an increase in population can put more pressure on the little goods and service thereby price will rise.

6.   The activities of middlemen in the distribution of goods and services can also cause severe inflation in the economy.

7.   Monopolist prices with respect to production, importation and distribution of certain essential commodities can causes inflation.

8.   increase in salaries and wages and competitive attempts by various economic and social groups to increase their share of the “national” cake’ cause inflation.

Theoretically increase in demand and a decline in supply causes inflation.

      Akpakpan (1991), Okowa (1995) Maro  (1996) and Gbosi (1993) all offer similar arguments on the theorized causes of inflation when inflation is attributed to a general excess demand in the system. It is tagged” demand pull inflation”. Here inflation occurs as a result of demand for goods and services exceeding the supply of goods and services at the existing prices.

      Inflation is said to be “cost push” when it arises from the supply or cost side of the economics system. This type of inflation can be brought about by:

a.                  Higher price incurred by monopolist or oligopolistic firms; this is termed “Profit Push”.

b.                  Higher wages secured by unions; this is termed “wage Push”.

Profit bush inflation is said to occur where firms raise price level more than enough to offset any cost increase. This increases; cost of living for workers, forces them to ask for more pay. More pay for workers increase cost of production. This in turn increases price and the spiral continues.

Wage –push inflation is said to occur where trade unions have successfully push wage increases beyond the rate of increase in labour productivity. Going by the quantity theory of money’ approach, Akpakpan (1991) and Gbosi (1993) argue that increase in money supply can be a cause of proportionate price increase. This inflation occurs and continues as long as money supply is expanding.

Another theory that explains the cause of inflation is the “sector shift theory”. Because aggregate demand is not constant, as consumers tend to change their taste and preferences; the demand for certain goods will increase. Gbosi declares that according to the sector shift theorists, in order to increase their profit margins, firms will raise product prices. This prices increase is subsequently shifted to all sectors of the economy.