What really drives inflation higher?
Hmmm...it's a complicated question, but I'll give it a shot.
At the most fundamental level, I suppose, it's based on the supply of money and the supply (affordability, efficient production of) of underlying goods and services.
For example, if you were to substantially increase the amount of money in the economy...everything else being equal, the price you pay for goods and services will increase (though, if everyone has more money anyway, the effect would at least partly be mitigated). Likewise, if the supply of underlying goods suddenly dried up (for example, OPEC countries limited the supply of oil output) then, all things being equal, the price of those goods would increase.
A bit of inflation is actually good for the economy. It encourages consumption (because if you delayed your purchase, you would have to pay more later), it reduces the burden on borrowers of funds (because the real value of the loan will decrease, even if the nominal value is the same) and reduces things like labour costs for employers.
There are times, of course, when inflation gets out of control and becomes hyperinflation. This usually occurs when people's confidence in the government handling of finance collapses. Governments have a fundamental conflict of interest because the more money they print, the richer they become. However, whenever they print money, they are essentially reducing the value of all the money already in circulation. The people have to trust the government to be able to act responsibily in a way that maintains the real value of the currency. That's the reason why many developed countries today have made their central banks independent, so that short-term political ends does not override long term responsible currency management to keep inflation under control.
Ndisu us the Zimbos. Honestly, it beats me as well, i hope u get a good answer!
Naidu K L inflation is price rise. I think inflation is driven by funny policies adopted by greedy official to satisfy their needs.
There is only one thing that causes inflation (high or low). That is an increase in the supply of money. Inflation is caused (in the US, at least) when the Federal Reserve either purchases US Bonds (giving money to the government, who promptly spends it. Where does the Fed get the money to purchase these bonds? From thin air. Thus the continual reference to the Fed "Printing Money") or reduces the daily dollar rate. The interest rate they change is the rate charged by the Fed on overnight loans to commercial banks. When the rate drops, banks borrow more. When banks borrow more, due to the fact that they are only required to keep a fraction of their total loans as currency, they hold onto some, and promptly loan out many times what they just got. i.e. they borrow 10M, and promptly make 50M in loans. This also increases the money supply.
Inflation is never a good thing. The rise in prices is a transfer of wealth. You see, the price increase does not happen all at once. Someone who gets the money first gets to spend it at today's prices. As the market adjusts to the increase in money by increasing the price level, the last people to get it pay at the inflated (higher) price.
In the short run, it is how fast the economy is moving (number of loans, consumer spending etc.)
In the long run, it is simply the government printing too much money.
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