Inflation is increasing due to increases in production costs, such as wages and raw materials. Inflation is defined as the measure of the rate at which prices of goods, services and products within an economy increase. This will lead to higher prices for general and basic necessities, therefore negatively impacting society.
What happens when inflation occurs?
When inflation occurs, prices of necessities and day to day items such as food, electricity, water and petrol can massively increase. This means that some products may become unaffordable or that individuals may have to start budgeting and prioritizing where and how they spend their money in order to get by.
When inflation begins, people generally become more and more concerned about the prospect of further inflation. This means that people will worry about how inflated prices of necessities may become in the near future, and therefore what they will be able to then afford.
Developed economies will have inflation monitored by central banks to make predictions about the future of inflation. Inflation is concerning because money which has been saved up until the present may become less valuable when everyday products are more expensive.
Why does inflation occur?
Inflation usually occurs due to an increased demand for specific products or an increase in production costs. There are two types of inflation: cost push inflation or demand pull inflation.
Cost push inflation
Cost-push inflation is due to an increase in production costs, including raw materials and wages. The demand for goods will remain the same while the supply declines due to increased production costs. Consequently, consumers are forced to pay more for the same product, leading people to turn to finance options like payday loans (source: We LendUs) and other forms of loan to tide over their finances..
Rising commodity prices are one of the key signs of this type of inflation, when major production inputs such as copper and oil become more expensive. Companies which rely on these materials then have to increase the cost of their products to cover the expenses.
Wages can also affect production costs and tend to be the biggest expense for businesses. When the unemployment rate is low and the economy is doing well, there may be shortages in labor. Businesses then increase salaries to attract new, qualified candidates, causing an increase in the costs of production. If the company then has to raise prices due to the increase wages of the employees, cost push inflation will occur.
Demand pull inflation is caused by increased demands for specific goods. Prices increase when there is an increased demand for a wide range of goods. This sustained demand can then cause demand pull inflation across the economy.
When wages rise, consumer confidence may increase due to low unemployment rates, which consequently leads to an increase in spending habits. This type of economic expansion directly impacts levels of customer spending and an additional demand for products. With this increased demand, there will be less supply, which consequently may cause prices to rise again. In the UK for example, there is expected to be an increase in people looking to borrow larger amounts (for example, by borrowing £15,000, £20,000 or even more) of money, to help get them through this period.
Consumer confidence tends to be high when unemployment is low, and wages are rising—leading to more spending. Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to a high demand for products and services.