Analyzing Inflation: Theories, Causes, Objections, and Evaluation

This essay provides an overview of inflation, defining it as a general rise in the prices of goods and services. It discusses the causes of inflation, differentiating between demand-pull and cost-push inflation, and elaborates on the factors contributing to each. The essay then focuses on the cost-push inflation theory, explaining how rising production costs lead to increased prices for consumers. It also presents objections to the cost-push theory, particularly its limited applicability to oligopolistic and monopolistic markets. The essay concludes by evaluating the theory in light of these objections, highlighting its weaknesses in explaining inflation across all market types. Desklib offers a wide range of academic resources, including solved assignments and past papers, to support students in their studies.

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Lecturer
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Inflation
(Blinder & J, 1988) defined the term inflation as that general rise in the prices of goods and service.
He claimed that inflation cannot in this matter be defined or announced due to the rise of one or
two goods and the general increase of many goods or services. Some of these goods according to
(Blinder & J, 1988) are food, housing, transportation, fuel, and apparel. He stated further that
these many goods and services but me increasing the impact to be felt in the economy and that
explains why one or two goods can not necessarily lead to inflation.
Causes of inflation
According to (muley, 2009) inflation is majorly caused by the excessive demand for goods or
services or the general decline in the supply aggregate or rather the output. This now explains
why the scholars like (Dr Econ, 2013) stated that there are two types of inflation: cost-push
inflation and demand-pull inflation. Both of these types result in an overall increase in the price
level of goods in the economy but the causes of the two types of inflation may differ.
Demand-pull inflation is as a result of the increasing demand for goods or services in a given
economy when that economy’s productive capacity is not reciprocating the same increase. This
means that there is less availability of goods and services in the market than the money supply.
It's generally termed as too much money spent chasing few goods. The major causes of demand-
pull inflation include
1. Interest rate cut
2. Rising wages and monetary growth lead to too much money in the economy and this
makes the prices for goods and services to increase.

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3. Increased government expenditure that increases the money supply in the economy as
well as driving up aggregate demand
4. Expectations for a future increase in prices leads to inflation in that people tend to save
for such periods and also the firms and workers increase their prices as a way for
catching up with the expected inflation (Agarwal, 2017)
On the other hand, cost-push inflation is caused by the increase in the inputs in the course of
production or simply raw materials. This leads to increase in prices for this goods and services
thus reducing the supply of the goods and services. (Amadeo, 2017) states that the causes of this
type of inflation include:
1. When there is monopoly achievement by a company. The company tends to reduce its
supply of good to achieve their profits objectives.
2. Wage inflation where workers and laborers force for increased pay and as a way of
getting the profit back, the companies pass the costs of labor to consumers by increasing
the prices of goods.
3. Government regulation and tax. Unfavorable and high taxes imposed by government
leaders to increase in the goods produced within that economy.
4. Exchange rates
5. Natural disasters that lead to inflation by hindering supply of goods and services.
Theories of inflation
Cost-push inflation theory
It’s a theory that was developed during and after the second world war. According to cost-push
inflation theory, the prices of goods and services rise due to rising cost of production. Majorly

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these cost of production is the cost of raw materials and labor costs or wages. During the
production of goods and services, when the cost of producing these goods goes high, the
companies pass this burden to consumers of these goods and this leads to increased prices. For
instance, according to this theory, take a situation whereby the steel goes high, the cost of the
tractor will consequently rise, this will automatically lead to costs of agricultural products being
produced with the help of that tractor. (Thorp & Quandt, 1959) It is caused by the monopoly
elements either in the labor market when there is wage-push or in the commodities market when
there is profit-push but mostly it is due to wage-push which increases the cost of production and
hence prices.
Objections of cost-push inflation
One of the objections to cost-push inflation theory is that it’s only a theory that can only be used
to explain why inflation occurs in some product markets and not all. This theory is only limited
to oligopolistic and monopolist market types whereby firms in these markets dictate the prices of
goods. They tend to raise the prices when there is a need for more prices or when compensating
costs of production incurred (labor and raw materials) due to the imperfect competition they are

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able to administer prices anyhow and thus inflation. But this is only in the above two markets;
the other markets like perfect competition and monopsony have a rear chance of rising prices so
as to increase the profit margins since the price is dictated by all participants in that market.
Therefore, the cost-push theory has weakness in explaining as to why inflation occurs since it
does not cover all markets.

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References
Agarwal, P., 2017. demand pull inflation. macroeconomics -intelligent economics, p. 1.
Amadeo, K., 2017. economic theory; cost-push inflation. The balance, pp. 1-2.
Blinder, A. S. & J, W., 1988. Economics; Principles and Policy. San Diego.: Harcourt Brace
Jovanovich, Publishers.
Dr Econ, 2013. education publications. [Online]
Available at: https://www.frbsf.org/education/publications/doctor-econ/
[Accessed 23 April 2018].
muley, R., 2009. economic discussion. [Online]
Available at: http://www.economicsdiscussion.net/essays/inflation-essays/essay-on-inflation-
types-causes-and-effects/17400
[Accessed 23 April 2018].
Thorp, W. & Quandt, R., 1959. The new inflation. north London: s.n.