Key Factors Causing Inflation

1. Supply Disruptions

• Unexpected shocks such as natural disasters, wars, or pandemics reduce the supply of goods and services. When demand remains the same (or rises), prices increase.
• Example: During the COVID-19 pandemic, lockdowns caused shortages of essentials and drove up food prices.

2. Increased Money Supply

• When there is too much money chasing too few goods, prices rise. If the Reserve Bank or government expands money supply without a corresponding rise in production, inflation occurs.
• Example: Post-2008 global financial crisis, many economies experienced inflationary pressure due to excess liquidity.

3. Future Price Expectations

• If people expect prices to rise, they demand higher wages and firms pre-emptively raise prices, creating a self-fulfilling cycle of inflation.
• Example: In India, expectations of rising onion prices often lead to hoarding, further worsening inflation.

4. Job Market Conditions

• When unemployment is low, companies compete for scarce workers by paying higher wages. This raises production costs and is often passed on to consumers as higher prices.
• Example: The U.S. has seen wage-push inflation when labour markets became tight post-COVID recovery.

5. Energy Price Fluctuations

• Energy is a key input for transport and production. A sudden rise in oil or gas prices increases costs across the economy, leading to inflation.
• Example: The Russia–Ukraine war (2022) caused global oil and gas prices to spike, triggering higher inflation worldwide.

6. Backlogs and Supply Chain Issues

• Disruptions such as shipping delays, container shortages, or factory shutdowns limit product availability, creating inflationary pressure.
• Example: Global chip shortage in 2020–21 increased automobile and electronics prices sharply.

7. Price Changes in Specific Industries

• Inflation may also result from sector-specific shocks. Even if overall inflation is low, sharp increases in certain items like food, metals, or automobiles can raise headline inflation.
• Example: A bad monsoon in India often increases food inflation even if core inflation (non-food, non-fuel) is under control.