At first, inflation sets in when total demand of goods and services exceeds the available output. This type of inflation is called demand-pull inflation. In Exploring the Causes of Great Inflation Lansing argues, “Demand-pull inflation occurs when people demand more goods and services in the economy when it cannot adequately produced the so demanded quantities”.1

Secondly, inflation is triggered by increase in costs of production. This can be increases in the prices of raw materials and wage increase among others. Lansing in Exploring the Causes of the Great Inflation points out that Cost-push inflation is characterized by increase in prices of production process inputs.2 Lansing adds that, “Rapid wage increases or rising raw material prices are common causes of this type of inflation.”3

Wage controls can also result to inflation. Mayer asserts that, imposition of wage-price controls in 1971 opened the door to the pursuit of an overly expansionary monetary policy.4 The expansionary monetary policy increases money supply in the economy increases bringing about inflation.

Effects of inflation

Inflation has various effects on community and the economy. Below are the effects of inflation;

Firstly, inflation discourages saving. This reduces the potential of the economy to grow since growth is driven by savings. Robert admits that, with inflation, people’s desire to save is discouraged and consumption made more attractive.5 This retards growth in the economy for a long period of time and it may find it difficult to end inflation.

In the second place, true profits are overstated in accounting when there is inflation.

In Inflation: Causes and Effects Robert says that, accountants tend to report higher values of companies’ profits due to depressing depreciation deductions below their proper economic levels.6 Also, the companies are subject to paying taxes on their profits which are high.

Inflation can lead to social unrest. When people understand that food prices have increased, they are more to riot. “Inflation and in particular food inflation is considered as one of the main reasons that caused the 2010–2011 Tunisian revolution[41] and the 2011 Egyptian revolution.”7

Also, balance of payments is negatively affected by increases in inflation. Robert confirms that, high inflation countries tend to have depreciating currencies relative to countries with low inflation.8 This results to high inflation countries will experience high prices of importing goods from other countries. Worsening of this situation can lead to abandonment of the currency of the country with high inflation even by its citizens.

Purchasing power of money falls with an increase in inflation. As a result, the taxpayers lose their money incomes. Also, those who earn fixed incomes get a fall in their purchasing power, but the real incomes of those who earn profits are increases.

Moderate inflation enables labour markets to reach equilibrium faster. Usha agrees that, inflation permits decreases in real wages even at constant nominal wages; moderate inflation enables labor markets to stabilize.9 Stability in the labor market is one of the goals of macroeconomics.

Moreover, inflation leads to hoarding whereby people tend to buy more goods at present in fear of a future decrease in the purchasing power of their money. Due to this, a lot of stock will be kept idle and may end up going bad since people focus on holding the goods.

Finally, inflation distorts the business cycle. According to Keeler, artificially low interest rates and the associated increase in the money supply lead to irresponsible, speculative borrowing, resulting in clusters of poor investing decisions which eventually have to be liquidated as they become unsustainable.10