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Causes of Inflation: What Is Inflation and Why Does it Occur?

Jun 22, 2022
Causes of Inflation: What Is Inflation and Why Does it Occur?

Inflation is all over the news, but what are some root causes? There are multiple types of inflation, each brought on by different economic shifts. In this article, we’ll break down the types of inflation and their common causes.

Understanding Inflation

Inflation is the rise in the prices of products, goods, and services over a period of time. On a short-term scale, inflation may feel insignificant. However, over time, it can significantly diminish the purchasing power of your money, savings, and investments.

Types of Inflation

  • Demand-pull inflation: This type of inflation occurs when demand is too high for supply. Prices are increased to maintain the sales equilibrium and supply chain, and to ensure companies can continue stocking goods.
  • Cost-push inflation: This type of inflation occurs when prices increase to meet input costs. If businesses are paying more for goods and services, rates rise for buyers.
  • Built-in inflation: This type of inflation is usually a result of either or both types of inflation: demand-pull and cost-push. Over a period of time, the cost of living rises, and these changes become a ‘normal’ economical state.

Common Causes of Inflation

  • Growing Economy: A growing economy that surpasses the ‘long-run trend rate’ is likely to lead to inflation. When demand increases faster than supply, there isn’t a sustainable rate of growth. In other words, if a growing economy induces the circulation of more buyer money, rates may eventually rise.
  • Expansion of the Money Supply: The federal government or central banks can add fiat currency to the economy. When this occurs, the money supply is altered which may lead to inflation. If the money supply is higher than what the economy is yielding, inflation occurs as an attempt to restore balance.
  • Government Regulation: The government monitors economic conditions and will create fiscal and monetary policies accordingly. Sometimes these expansionary policies can backfire, causing more issues for consumers and businesses alike.
  • Managing the National Debt: If the government has a high debt-to-gross domestic product (GDP) they aren’t able to pay off debt without gaining more debt. If the national debt is on the rise and output is lowering, inflation can occur as an attempt to pay off this debt with devalued money.
  • Exchange Rate Changes: A large portion of the economy is built on imports and exports. If the value of the dollar goes down in comparison to foreign currency, it can inflate the price of imported goods for all US consumers.

Adjusting to Inflation

Inflation can devalue your hard-earned savings, retirement allocations, and other assets. For years, gold and silver have been used as a potential hedge against inflation. When inflation is high, it can be important to consider diversifying your assets. This may be helpful in potentially safeguarding your retirement savings and hedging against long-term inflation.

Here at Rosland Capital, we offer precious metals in physical form. Customers can opt for direct delivery or precious metal backed-IRAs.

Contact Rosland Capital today at 1-844-552-0268 to connect with our knowledgeable team of specialists, who can help you make better informed decisions about purchasing precious metals.