Dr. Farzad Vajihi: What are the causes of inflation in a society?

Many factors can cause inflation in a society. The effects of some of these factors are temporary and short-lived, but there are also factors that leave more destructive effects in society, which in addition to challenging the daily life of ordinary people, cause more worrying challenges at its higher levels. They create society. The adviser […]

Many factors can cause inflation in a society. The effects of some of these factors are temporary and short-lived, but there are also factors that leave more destructive effects in society, which in addition to challenging the daily life of ordinary people, cause more worrying challenges at its higher levels. They create society.

The adviser of the country’s youth economic commission said: In general, there are three main factors for creating inflation in a society. The first factor or “demand pressure inflation” occurs when demand is greater than supply and this process leads to an increase in prices. The second type is known as “cost pressure inflation”. In this type of inflation, manufacturers must increase the price of their products, for example, if the price of steel increases, the price of a nationally produced car will also increase. There is another type of inflation called “wage price spiral” which is also known as internal inflation. As prices rise in a society, workers expect their wages to rise in proportion to the rise in prices. An increase in wages leads to an increase in demand, which in turn causes a wider group of workers in society to demand an increase in wages.

He added: There is another potential cause for inflation, although it may be used as a more well-known definition of inflation. A common description of demand-side inflation is that “too much money is chasing too few goods,” and some analysts argue that this interpretation of inflation means that the U.S. Federal Reserve sometimes creates too much money. Low interest rates in the short term increase the money supply to drive economic growth. However, an excess supply of money can lead to inflation caused by demand pressure in society. Historically, the Federal Reserve has responded by raising interest rates in the short term, deflating inflation and almost always affecting the economy.
The International Economist continued: In the early 1980s, former Federal Reserve Chairman Paul Volcker broke a long run of inflation by raising interest rates to nearly 20 percent. From that point on, inflation usually stayed in the 3-4 percent range, and US consumers didn’t worry too much about inflation. But in the post-Corona pandemic, this has changed. Also, the increase in oil prices, which was caused by Russia’s invasion of Ukraine, was reflected in the entire world economy and increased the cost of transporting goods.
Of course, these were not the only factors causing inflation. The Federal Reserve’s accommodative policy led to increased asset prices, lending, and consumer spending, further increasing demand-driven inflation. Commodity prices rose beyond the rise in oil prices, and cost-push inflation added to the new inflationary mix. The tight labor market also added spiraling wage-price inflation to the new inflationary mix. Some analysts even consider the financial stimulus of the federal government in 2021, so-called gasoline on the fire, which instead of controlling inflation caused by the factors of war and epidemic, etc., caused this inflation to deepen. Of course, it can be said that all these factors played a role in increasing inflation in these years, but which factor played a more key role is debatable.