How is Inflation Caused?
There are three main views about how inflation is caused: 1. Demand-pull. This means buyers want to buy more than sellers can actually produce; so sellers start to put prices up. 2. Cost-push. This means business costs start to rise (eg oil prices rise, or wages start to rise) and sellers need to put prices up to compensate. 3. Monetarist view. This means the government allows too much money to be created . If the supply of money rises, then the price falls just as if the supply of potatoes rises, then the price falls. The price of money here is how many goods and services it will buy. If the price of money falls, then it will buy fewer goods and services ie prices of goods and services rise and the value of money falls. This is inflation. 4. In practice, we might get bits of each. How is Inflation Controlled by the Government? In 1997 the new Labour government gave monetary independence to the Bank of England. This means the Bank decides what to do without political interference. The
