During times of inflation, you may pay a few extra dollars to cover the cost of something.
The effect of inflation is the price increase of everyday consumer's goods and services. Former Major League Baseball player Sam Ewing once said, "Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair." Leading economists and politicians have debated inflation, suggesting different theories for its origin.
Demand-Pull Inflation
The demand-pull theory suggests that inflation occurs when aggregate demand exceeds aggregate supply; essentially, the number of people wanting to purchase goods and services outweighs what is available. When more people want to spend money on something, the price will increase to account for the greater demand. This scenario is typically associated with a strong economy and low unemployment, when more people put money into the economy.
Cost-Push Inflation
Cost-push inflation occurs when goods and services become more expensive to produce, which means prices increase to maintain a desirable profit margin. A shortage of raw materials also can contribute to cost-push inflation. One example of this was the 1973 oil crisis, when some Middle Eastern and North African countries placed an embargo on oil exports to the U.S.
Monetarist Theory
The monetarist theory suggests the money supply determines inflation, which occurs when the rate of a country's income rises faster than economic growth. If additional money is pumped into the economy while prices of goods and services remain the same, it will potentially result in inflation. Top causes of an increased money supply are banks increasing lending, or central banks, such as the Federal Reserve, printing more money and buying government assets.
Devaluation
Currency evaluation can cause inflation, especially when countries rely heavily on imports. If a country with a weak currency purchases goods from a country with a stronger currency, products will become more expensive to buy and will be sold at a greater cost.
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