The Cause Of Inflation: Causes Of Macroeconomics

INTRODUCTION

Inflation is defined as the percentage rate of increase in the general price level. Inflation is a macroeconomic issue faced by all economies including underdeveloped, developing and developed countries. Inflation can be further expressed as firms increasing markup on imported raw materials, labor cost in order to maximize their profits.

Inflation can be either predictable or unpredictable. Predictable inflation occurs when policy makers are able to predict an increase in the price level of goods and services whereas unpredictable inflation is when consumers are surprise with the rise in the price of goods and services. Inflation rate is measured by the percentage change in price level from one year to another year. To calculate

Thus, the interested customers will be willing to pay higher prices to purchase these goods. This theory is also part of Keynesian argument.

The figure 2.0 shows what happens in demand pull inflation. So as the demand increases the prices also increases moving from AD1 to AD3. Figure 2.0

Causes of Inflation

Some of the causes of inflations are:

i. Demand-Pull inflation. This occurs when the goods supplied is insufficient to meet the aggregate demand for the society. So due this society compete for the available goods, which leads to increase in prices for goods. ii. Cost-push inflation. The increase in cost of factors of production (wages and salaries) is passed on to consumers in the form of higher prices. iii. Increase in the price of world crude oil since 2006 by almost 68%. iv. Increase in prices of imported raw materials.

v. Expansion of money supply.

Effects of Inflation

i. Due to inflation the value of money falls. This means that the $1 that use to buy the goods before, if used in inflationary period that same $1 will buy less goods than before. So in other words purchasing power of the money has fallen. ii. Income and wealth are not distributed

The currency of the Fijian dollar is worth less than what it was before hence, consumers’ purchasing power decreased. Secondly, is the increase in the interest rates. As interest rates increase firms will not borrow money from financial institutions hence, they cannot expand their business or make investments. The firms will be able to expand and maximize their profit through increasing the price of good and service, hence to compensate the increase in interest rate. Another factor which gives rise to inflation is the steady increase in global commodity prices such as oil and wheat. Since these two commodities are raw materials used for producing other goods and services such as flour, biscuits and cooking oil, this will definitely mean an increase in the cost of producing these goods for firms who are engaged in its production. Since firm’s objective is to maximize profits and minimize costs, they will achieve this by reflecting the increase in the price of those imported raw materials in the selling price of its final goods and services such as biscuits and