The cost push inflation is caused by a drop in aggregate supply (potential output), this may be due to natural disaster, or increased prices of inputs e.g. a sudden increase in oil may lead to increased oil prices, and can cause cost push inflation. Cost push inflation happens when production costs rises. Sellers can no longer supply the same output at current prices, and again demand-pull inflation is set off by an increase in demand for goods and services without any increase in supply. Some of the major effects of inflation are as follows: 1.
Firstly, demand- pull inflation. A situation where aggregate demands for goods and services greater than the available supply of the output. This will cause the general increase in price level of the economy. Lower tax at increase government spending will lead to demand- pull inflation. A failure of the Central Bank to region in the MS also makes the demand- pull inflation worse.
Negative Effect To whole economy, the rates of high inflation rates are observed as adverse. Effects of inflation are market inefficiencies, and create complicate for firms to plan long-term finance. Inflation can serve as a burden on productivity as organizations are compelled to change resources away from products and services for targets on profit and losses from inflation of currency. Concern about the power of purchasing in future of money depresses investment and saving and inflation can charge hidden tax raises. Higher inflation in one economy than another will lead to the exports of first economy to become more costly and impact the trade balance in trading internationally Positive
Therefore, it causes depreciation of currency. If inflation of one country is increased, its real interest rate drops correspondingly, for which its currency becomes less attractive to investors and its value in the international currency market would decrease. This in turn also causes depreciation. Inflation is generally a bad thing for an economy, as it discourages investment, especially in fixed income instruments (bonds and currencies). It hurts consumers, who see their pay checks become worthless, and their costs increase.
Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (Higher wages may also contribute to rising demand) 2.2.2. Import prices If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation or depreciation means the rand is worth less, therefore we have to pay more to buy the same imported goods. 2.2.3.
Liquidity is defined as an important factor, which influences the asset prices. According to the paper of Amihud & Mendelson (1991), an asset is liquid if it can be bought and sold very quickly in the current stock market with a lower cost. In addition, due to the evidence of the stock market crash of October 1987, it shows that the decreasing in liquidity, also leads to the decreasing in asset price. In general, we can see the private benefits also increasing due to the increasing of the liquidity of the asset, because the issuers could sell more liquid securities at a higher asset price. Therefore, it shows when the financial analysts value the assets; they should not only consider the expected return and risk of the asset, but also the liquidity.
Demand Pull Inflation: This sort of inflation occurs when aggregate demand is more than the aggregate supply leading to decrease in unemployment (as per the Phillips curve). This theory can be summarized as "large sum of money purchasing few goods". In other words, the growth in demand is much faster than growth in supply and price rise is continuous. This is usually a scenario observed
• Price Fluctuation - Sales and promotion discounts also cause a bullwhip effect by forming a boom-or-bust cycle where the sales surges in the discount period while it drops afterward. This can also result in stock running out during sales, where customers have to leave empty-handed. • Rationing and Shortage Gaming - It causes bullwhip effect when customers purchase more than what they need during short supply periods. Liberal return policies can also bring about this effect where the customers can take advantage of the situation. Thus it becomes difficult to make accurate demand
As the average cost of production rise, the selling prices of the product increase, leading the public to the inability to meet up with the expenses. Finally, it will negatively affect the profit of the business and indirectly affects the return of the investors. As a result, due to the impact inflation rate have on the profitability of business, it is important to be considered by investors before making any investment in that
He explained that with the increase in net exports and rise in the gold flow into a country to pay for them, the prices of goods in that country will rise. He showed that the rise in domestic prices due to the gold inflow would encourage imports and discourage exports, thereby automatically limiting the amount by which exports will exceeed imports. This adjustment mechanism is known as the price-specie-flow mechanism. An important facet of Hume’s monetary theory