Inflation can come from both the demand and the supply-side of an economy
Inflation can arise from internal and external events
Some inflationary pressures direct from the domestic economy, for example the decisions of utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets.
A rise in the rate of VAT would also be a cause of increased domestic inflation in the short term because it increases a firm's production costs.
Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.
Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index
Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap
When there is excess demand, producers can raise their prices and achieve bigger profit margins
Demand-pull inflation becomes a threat when an economy has experienced a boom with GDP rising faster than the long-run trend growth of potential GDP
Demand-pull inflation is likely when there is full employment of resources and SRAS is inelastic
Main Causes of Demand-Pull Inflation
Cost-push inflation occurs when firms respond to rising costs, by increasing prices to protect their profit margins.
There are many reasons why costs might rise:
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