Causes of Inflation: Historically, a great deal of economic literature was concerned with the question of what causes inflation and what effect it has. There were different schools of thought as to the causes of inflation. Most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation. The causes of inflation are as follows:
1. Demand-Pull Effect: Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation encourages economic growth since the excess demand and favourable market conditions will stimulate investment and expansion.
2. Cost-push effect: Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply. This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Another example stems from unexpectedly high Insured losses, either legitimate or fraudulent.
Cost-push inflation can be caused by many factors. The factors are as follows: * Rising Wages * Import Prices * Raw Materials Prices * Profit Push Inflation * Declining Productivity * Higher Taxes

3. The Money Supply: Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since industrialized nations moved away from the gold standard during the past century, the value of money is determined by the amount of currency that is in circulation and the public’s perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economy’s growth rate, the value of money can fall because of