Inflation can
be defined as the persistent & significant rise in general price levels
across the economy
over time. This
rise in price causes a decline in the purchasing power of money. Mild inflation
is
considered
favorable for economic growth. However, high inflation lends to instability to
the financial
system and
distorts economic growth. So, low and stable inflation bring stability to
financial system and
fosters
sustainable economic growth.
Causes
of inflation
Inflation is
the result of disequilibrium between demand and supply forces. So, it attributed
to an
increase in the
demand for goods and services in the country and a decrease in the supply of
goods in
the economy.
Causing from
demand side
1) Increase in
money supply: An increase in money supply decreases the interest rate and
increases the
wage. Decline
in interest rate increases the loan and investment activities which ultimately
increase the
purchasing
power. Increase in wage directly contributes for higher purchasing power.
Higher purchasing
power increases
the demand.
2) Increase in
govt. expenditure and decrease in tax rate: An increase in government
expenditure such
as development
and welfare activities causes an increase in the aggregate demand for goods and
services and
when government reduces taxes, it increases the disposable income of the people
which
ultimately
raises the demand for goods and services.
3) Increase in
private expenditure: During the period of good business expectations, the
businessman
start investing
more and more funds in new enterprises this increases the demand for factors of
production.
This results in an increase in factor prices. The increased factor incomes
raise the
expenditure of
consumption of goods and services.
4) Increase in
social security payment: An increase in social security payment such as
widow/old
age/unemployment
allowance increases the purchasing power which causes an increase in aggregate
demand for
goods and services.
5) Black Money:
Black money is earned through illegal transactions and tax evasion. Such money
raises
the aggregate
demand and hence price level.
Causing
from supply side
1) Increase in
wage rate without increases in productivity will push up the cost of production
and lead to
producer to
raise the prices of their products. On the other hand, trade union activities
such as strikes
also lead to
stoppage of work, decline in production and rise in prices.
wage (without
increases in productivity) costprice, and trade(strike)productionprice
2) Natural
Calamities also creates the inflationary pressure by reducing the production in
the economy.
Floods and
draughts adversely affect the supply of products and raise their prices.
Natural
calamities,productionprice
4) During war
period, economic resources are diverted to the production of war materials.
This reduces
the normal
supply of goods and services for civilian consumption which leads to the rise
in the price
level.
5) In the
modern times, a major cause of inflationary rise in prices in most of the
countries is the
international
rise in the prices of basic materials (eg. petrol) used in almost all the
industrial materials.
6) Profits:
Firms raise prices so that they can earn more profit and result cost–push
inflation. This is most
likely
occurring, when market is moving towards monopoly or perhaps oligopoly.
7) Imported
inflation: In the global economy, firms import significant proportion of their
raw materials
or
semi–finished goods. If the cost of these imports increases, then firms will be
forced to increase
prices to pay
the higher level raw material costs.
8) External
shocks: This could be either for natural reason or because of group or country
with more
power. For
example, earthquake in Japan disrupted world production of semi–conductor for a
while.
Another is that
in the case of OPEC which forced up the price of oil four–fold in the early
1970s.
9) Taxes:
Increase in indirect taxes increases the cost and push up the prices of
products.
Causes
of inflation in case of Nepal
Money supply,
international prices (particularly Indian prices), exchange rate, real output,
government
expenditure and
expectation factors are the major sources of inflation in Nepal. Similarly,
infrastructural
bottlenecks,
imperfect market conditions and low production agricultural sector are also
instrumental
for inflation
escalation.
1. Price
movements in Nepal have largely mirrored India's price. In the context of
Nepal, a weaker
supply of
domestic production is supplemented by the increased imported goods on Indian
prices
especially
after 1991's political change. So, inflation in Nepal is mainly determined by
imported inflation
i.e. Indian
inflation. This is due to geographical situation having a shared open border,
which facilitates
informal trade
and a rigid pegged exchange rate regime between both currencies. [While
importing
goods from
abroad we also import inflation]
2. Government
expenditure is an increasing trend. Revenue from tax and non–tax revenue is not
adequate to
finance the growing government expenditure and hence, there is a growing budget
deficit. In order to finance the growing budget deficit, the government will have
borrowed from domestic as well as
foreign
sources. This help to increase money supply and hence inflation in the country.
3. Monsoon
based and less productive agricultural sector fails to keep pace with the
increase in demand
for food.
Since, defective land tenure system, primitive methods of cultivation, lack of
irrigation
facilities,
growing pressure of population on land leads to a rise in prices of food
grains.
4. The major
infrastructural bottlenecks in the field of power and transport restrict the
growth process
in other
sectors and causes underutilization of productive capacity of the economy.
Underutilization of
resources does
not absorb the full increase in money supply and leads to an inflationary rise
in price or
(production
(supply) less–demand high).
5. Market
imperfections such as factor immobility, price rigidity, rigid social and
institutional structures,
lack of
training and technology has not allow an optimum utilization of resources and
enhance the
productivity.
This reduces the production and do not meet the demand, thereby rises in
prices.
6. Wages have
been rising. Agriculture labor wages, construction wages and regular worker has
created
further
pressure in inflation. This is due to large number of worker are migrated and
resulting worker
shortages
shortages also explain the wage increase.
7. Huge
remittance inflows in the recent passed has also increased the aggregate
demand, without
raising the
nation’s production capacity. This has added upward pressure on wages
inflation. Regular
increased civil
services salaries also helped to increase inflation
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