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INFLATION CAUSES
There are many causes for inflation, depending on a number of factors. For
example,
inflation can happen when governments print an excess of money to deal with a
crisis.
As a result, prices end up rising at an extremely high speed to keep up with the
currency
surplus. This is called the demand-pull, in which prices are forced upwards
because of a
high demand.
the company increasing prices to maintain steady profits. Rising labor costs can
also
lead to inflation. As workers demand wage increases, companies usually chose to
pass
on those costs to their customers.
Rising imported raw materials costs perhaps caused by inflation in countries that
are
heavily dependent on exports of these commodities or alternatively by a fall in
the value
of the pound in the foreign exchange markets which increases the UK price of
imported
inputs. A good example of cost push inflation was the decision by British Gas and
other
energy suppliers to raise substantially the prices for gas and electricity that it
charges
to domestic and industrial consumers at various points during 2005 and 2006.
Rising labour costs - caused by wage increases which exceed any improvement in
productivity. This cause is important in those industries which are �labour-
intensive�.
Firms may decide not to pass these higher costs onto their customers (they may be
able to
achieve some cost savings in other areas of the business) but in the long run,
wage
inflation tends to move closely with price inflation because there are limits to
the
extent to which any business can absorb higher wage expenses.
Higher indirect taxes imposed by the government � for example a rise in the rate
of
excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a
rise
in the standard rate of Value Added Tax or an extension to the range of products
to
which VAT is applied. These taxes are levied on producers (suppliers) who,
depending
on the price elasticity of demand and supply for their products, can opt to pass
on
the burden of the tax onto consumers. For example, if the government was to
choose to
levy a new tax on aviation fuel, then this would contribute to a rise in cost-push
inflation.
causes a contraction of real national output together with a rise in the general
level
of prices.