There are several causes of inflation. Economists describe the type of inflation largely divided into “cost push” or “demand pull.” As the cost of goods or services increases, the price of the goods that consumers finally buy increases, which is cost-driven inflation.
But prices go up even if the demand for any good exceeds the supply capacity, which is called demand-driven inflation.
Inflation now is largely driven by cost traction. Energy is a necessary factor for most goods and services, and if prices rise as they do now, producers will have to pass on the cost increase to consumers. Due to the COVID-19 pandemic, supply was disrupted in China and other regions, and it had a similar effect. Prices have risen as the supply of raw materials, consumer electronics, and auto parts has decreased.
What problems excessive inflation causes
The most representative risk of inflation is that if prices rise faster than imports, people’s capacity to buy goods and services decreases. This could mean a decline in living standards.
In fact, the negative effects of inflation are more subtle. It has the effect of affecting different groups in different ways and destabilizing society as a whole.
The negative effects of inflation include:
• Inflation is most damaging to people who rely on fixed incomes, such as pensioners.
• The value of cash declines and the desire to save decreases.
• The demand for higher wages for workers can lead to a “wage-price spiral,” which can intensify inflation.
• Increased borrowing costs and increased financial pressure on households and businesses.
• As future costs become less predictable, companies may defer investment.
• The exchange value of the currency may decrease and import costs may increase.
• It can increase government costs and debt. This is because you may need to set up more provisions for pensions and other expenditures.
• At worst, countries struggling with high inflation may have to abandon their local currencies and adopt more stable currencies. That’s what happened in Zimbabwe, and after hyperinflation in 2008, the last resort was to use the U.S. dollar.