Fundamentally, inflation means an increase in the money supply, income or prices. During inflation, we spend money faster than the production of goods. The purchasing power of money becomes less, creating an adverse impact on a country’s economy. What really causes inflation?
Many reasons cause inflation. When the productivity of a nation falls, and the demand remains constant, the prices start increasing. In such a situation, people buy more goods than their actual needs due to the fear of further increase in price. This creates shortage of goods. And this shortage in excess of their needs leads to further rise in the prices. In such a situation if people reduce their purchases, the inflation can be brought under control. But it is difficult to educate people in this regard.
It leads to a vicious circle. As the prices shoot up, the businessmen start hoarding to earn more profits. It causes temporary shortage of goods in the market. This shortage again leads to the spiraling of prices. Industrial strikes are also responsible for the inflation. Due to strikes the production goes down and prices increase rapidly. Greater circulation of money also causes inflation.
Inflation will have an impact on the savers, creditors, labors classes and the salaried group. Under such circumstances, government analyses the cause of inflation and takes necessary steps to control it.