Explain two causes of price inflation

One cause of inflation is due to the wage rate increasing at a faster rate than output. The cost of production for firms increases and to maintain profits they are likely to raise prices. When the prices rise, wage increases are demanded by employees to maintain their standard of living. This subsequent increase in wages leads to higher production costs and prices rise again. This could cause a wage-price spiral and this is a type of cost-push inflation.Another cause is an increase in bank lending. This would result in households likely spending more and consumption would increase in the economy. This would increase aggregate demand as consumption is a component of aggregate demand and demand-pull inflation would occur as goods and services are used up. This could be due to demand increasing faster than supply can grow. Prices would rise due to the rationing function of the price mechanism and inflation would occur.

SN
Answered by Siddarth N. Economics tutor

1834 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What is inflation? What is the difference between real and nominal GDP and why is it important to measure GDP in real growth terms?


When answering my essay question, what could be the key evaluative points when talking about fiscal policy?


How many real life examples do i need for application points?


Analyse the effects on the UK economy of a recession in another economy with trade ties.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning