What Are The Factors That Causes Inflation In A Country


A sustain increase in the general level of prices is called inflation. Not only do inflation discourage investment but also it makes difficult for people to survive and fulfill their necessities.

When the prices of the necessary items go up in the market, making it difficult for the local public to afford; this is called direct inflation. No government in the world would ever want to carry out mass inflation willingly because it would eventually lose its vote bank. However, all the decisions are taken according to the country’s economic conditions.

There are many causes of inflation: let’s understand the different types of inflation.

  • Demand-Supply Inflation

We all know that the prices go up when there is more demand and less supply. We call it ‘temporary inflation’ which run away with the passage of time.

  • Cost-Push Inflation

This depends upon the prices of certain items in the international market. If the import cost of certain items increases, it will cost direct inflation. For example: if the prices of oil go up in the international market, it will cause immediate inflation in the country because many things are directly and indirectly attached to the prices of petrol.

  • Devaluation

What happens when the currency of a country is devalued? The worst thing is, it causes direct inflation. While currency devaluation has its own reasons and causes, but it will increase the prices of imported items. However, local products (which are manufactured within the country) will have little to no effect with the currency devaluation. Still, it will affect the country’s exports.

  • Debt

If your country is going through a reasonable amount of debt, it will cause massive inflation. Whether it’s a circular debt or an external debt; they have a direct effect on the prices because the government plans to earn enough to return the loan at the right time. The government decide the rate of inflation when they propose a budget; as like in Pakistan, the current inflation rate is 7.64%

Take an example of Pakistan; the country is facing an external debt of $85.5 Billion which includes loans from the IMF, ADP, World Bank, and other borrowers. As a result, the country has removed the subsidies and imposed heavy taxation on people and the business community. It is taking necessary measures to pay the loan in time to avoid excessive interests.

There are many other reasons for inflation, but these are the major ones that cause immediate inflation in a country. So if your country has gone under a currency devaluation period or if you see a rise in cost in the international market, inflation is obvious.

To many economists, the healthy rate of inflation is around 2% to 3%.

Leave a reply