The Most Popular Explanation for Inflation: Uncontrolled Increase in Prices

Choose the explanation you think is the most popular!

Author: Gregor Krambs
Updated on Feb 23, 2024 06:03
Welcome to StrawPoll, where opinions matter and voices are heard! Today, we invite you to dive into the world of economics and explore the most popular explanations for inflation. This fascinating ranking is your chance to vote for your favorite theory or even suggest a missing option. Be part of the conversation as thousands of curious minds come together to rank and discuss the driving forces behind the ever-evolving phenomenon of inflation. Don't miss this opportunity to contribute your insights and learn from the collective wisdom of the StrawPoll community. Cast your vote now and let's uncover the mysteries of inflation together!

What Is the Most Popular Explanation for Inflation?

  1. 1
    74
    votes

    Demand-pull inflation

    John Maynard Keynes
    Occurs when demand for goods and services exceeds the supply, leading to an increase in prices. This can occur due to an increase in consumer confidence, government spending, or an increase in money supply.
    Demand-pull inflation is an economic theory that suggests inflation occurs when there is excessive demand for goods and services in an economy. It occurs when aggregate demand outpaces the available supply, leading to increased prices and inflationary pressures. This type of inflation is typically associated with periods of robust economic growth and strong consumer spending.
    • Economic growth: Demand-pull inflation is associated with periods of economic expansion.
    • Consumer spending: It is characterized by increased consumer spending, which drives up demand.
    • Excessive demand: There is an imbalance between demand and supply, with demand exceeding supply.
    • Price increase: It leads to higher prices as businesses respond to increased demand.
    • Aggregate demand: It is caused by a rise in aggregate demand, including household consumption, government spending, and investment.
  2. 2
    31
    votes

    Cost-push inflation

    A.W. Phillips
    Occurs when the cost of production increases, leading to an increase in prices. This can occur due to an increase in the cost of raw materials, labor, or energy.
    Cost-push inflation is a type of inflation that occurs when the cost of production for goods and services increases, causing businesses to pass on these increased costs to consumers in the form of higher prices.
    • Definition: Cost-push inflation is the result of higher production costs leading to an increase in prices.
    • Cause: It occurs due to factors such as increased wages, higher raw material costs, higher taxes, or increased import prices.
    • Producer influence: Producers have the ability to raise prices due to increased production costs.
    • Wage-price spiral: Cost-push inflation can trigger a wage-price spiral, where higher prices lead to demands for higher wages, and higher wages lead to further price increases.
    • Demand impact: It can reduce consumer purchasing power and lead to decreased demand for goods and services.
  3. 3
    23
    votes
    Occurs when the money supply increases faster than the rate of economic growth, leading to an increase in prices. This can occur due to central banks increasing the money supply, or due to government deficits.
    Money supply inflation refers to an increase in the overall supply of money in the economy, which leads to a sustained rise in prices and a decrease in the purchasing power of money. This theory suggests that inflation occurs when the amount of money circulating in an economy exceeds the productive capacity of that economy to supply goods and services.
    • Definition: Increase in the overall supply of money in an economy
    • Effects: Rise in prices and decrease in purchasing power of money
    • Cause: Money supply exceeding productive capacity of the economy
    • Contributors: Irving Fisher, Milton Friedman, and others
    • Relationship to inflation: Money supply inflation is considered one of the main causes of inflation
  4. 4
    18
    votes
    Occurs when wages increase faster than productivity, leading to an increase in prices. This can occur due to labor unions, minimum wage laws, or a tight labor market.
    Wage inflation refers to the phenomenon where there is an increase in the overall wages or salaries paid to workers in an economy. It is a popular explanation for inflation as it suggests that when wages increase, businesses pass on these increased labor costs to consumers by raising the prices of goods and services.
    • Definition: Increase in overall wages or salaries
    • Impact on inflation: Wage increases passed on to consumers through higher prices
    • Causes: Demands for higher wages, labor market conditions
    • Effect on purchasing power: May erode purchasing power if wage increases outpace productivity growth
    • Examples: Rapid wage inflation in Venezuela, Brazil, Argentina in recent years
  5. 5
    15
    votes
    Occurs when prices of imported goods increase, leading to an increase in prices of domestically produced goods. This can occur due to changes in exchange rates, tariffs, or global supply chain disruptions.
    Import inflation refers to the increase in the general price level of goods and services in an economy due to the rising cost of imported goods and services. This occurs when a country becomes dependent on imports and experiences a depreciation of its currency relative to the currencies of its trading partners.
    • Type: Economic phenomena
    • Cause: Depreciation of domestic currency relative to trading partners' currencies
    • Effect: Increase in general price level
    • Import dependence: Higher import reliance increases vulnerability to import inflation
    • Domestic production capacity: Higher domestic production capacity reduces import dependence and inflation
  6. 6
    9
    votes
    Occurs when people expect prices to rise, leading to an increase in prices. This can occur due to past experience, media reports, or changes in government policies.
    Inflation expectations refer to the anticipated rate of increase in the general price level in an economy over a given period. It reflects the beliefs and predictions of consumers, businesses, and investors regarding future inflation. Inflation expectations play a crucial role in shaping economic decisions, such as wage negotiations, investment plans, and monetary policy choices.
    • Forward-looking: Inflation expectations are forward-looking, considering future changes in prices.
    • Influence on behavior: Inflation expectations influence consumer spending, saving behavior, and investment decisions.
    • Adaptive or rational: Expectations can be either adaptive (based on past experiences and observations) or rational (based on economic fundamentals and available information).
    • Anchoring: Expectations may be anchored, meaning they persistently deviate from actual inflation rates without adjusting quickly.
    • Inflationary spiral: High inflation expectations can contribute to an inflationary spiral, where price increases and wage demands reinforce each other.
  7. 7
    12
    votes

    Inflation inertia

    Robert J. Barro
    Occurs when prices continue to rise due to the expectation of future inflation, even when the underlying causes of inflation have been eliminated. This can occur due to sticky wages, contracts, or pricing strategies.
    Inflation inertia refers to a key concept in economics that explains the persistence of high levels of inflation over an extended period. It suggests that once inflation is embedded in an economy, it can be difficult to reverse or bring down to a lower level.
    • 1: Inflation inertia was first proposed by economist Robert J. Barro in 1977.
    • 2: It argues that current and past inflation rates influence future expectations and behavior.
    • 3: It posits that people form adaptive expectations, assuming future inflation rates based on their experience of recent inflation.
    • 4: Inflation inertia suggests that there is a lag in price adjustments, leading to a slow decline in inflation even when external factors change.
    • 5: It highlights the role of inflation expectations and the sticky nature of wages and prices.
  8. 8
    9
    votes

    Structural inflation

    William J. Baumol
    Occurs when the economy faces long-term structural issues that lead to persistent inflation, such as income inequality, demographic changes, or supply-side constraints.
    Structural inflation is an economic theory that attributes inflation to underlying structural factors within an economy, rather than mere changes in demand or monetary policy. It suggests that inflation is caused by imbalances in supply and demand, disruptions in production processes, or structural rigidities in goods and labor markets.
    • Cause: Imbalances in supply and demand, disruptions in production processes, or structural rigidities in goods and labor markets
    • Long-term nature: It is considered a long-term phenomenon
    • Persistence: Structural inflation tends to persist even after demand and monetary conditions stabilize
    • Independent of monetary policy: It suggests that inflation is not solely influenced by changes in money supply or interest rates
    • Factors affecting pricing: It considers factors such as rising labor costs, changes in technology, and market power as drivers of inflation
  9. 9
    8
    votes
    Occurs when the rate of inflation becomes extremely high, leading to a collapse in the value of the currency. This can occur due to war, political instability, or monetary mismanagement.
    Hyperinflation is an extreme form of inflation characterized by rapidly increasing prices and a sharp devaluation of a country's currency. It typically occurs when there is a loss of confidence in the currency, resulting in a vicious cycle of increasing prices and decreasing purchasing power. Hyperinflation can have devastating consequences for an economy, leading to collapse of the monetary system, widespread poverty, and social unrest.
    • Rapid price increases: Prices in hyperinflationary environments can rise at alarming rates, often doubling or even tripling within short periods.
    • Currency devaluation: Hyperinflation leads to a significant devaluation of the national currency, eroding its purchasing power and reducing its value relative to foreign currencies.
    • Loss of confidence: Hyperinflation is caused by a loss of confidence in the economic stability of a country, leading to a rapid increase in the demand for alternative currencies or goods.
    • Money printing: Governments often resort to excessive money printing to finance their expenses, further exacerbating the inflationary spiral.
    • Decreased savings: Hyperinflation erodes the value of money, making it difficult for individuals and businesses to save or invest their wealth.
  10. 10
    4
    votes

    Deflationary spiral

    Irving Fisher
    Occurs when falling prices lead to a decrease in demand, which leads to further price declines, creating a vicious cycle. This can occur due to a recession, debt deflation, or a sudden decrease in demand.
    The deflationary spiral is an economic theory that suggests a self-reinforcing cycle of decreasing prices leading to reduced consumption, lower investment, and declining economic activity. It is a situation in which the overall price levels in an economy continually decrease, causing consumers to hold onto their money and delay purchases in anticipation of even lower prices in the future. This further decreases aggregate demand, leading to a downward spiral of falling prices, reduced wages, job losses, and economic depression.
    • Name: Deflationary Spiral
    • Creator: Irving Fisher
    • Main idea: Self-reinforcing cycle of decreasing prices and reduced economic activity.
    • Cause: Decreased consumption and delayed purchases due to anticipation of even lower prices.
    • Effects: Reduced investment, declining economic activity, falling prices, lower wages, job losses, economic depression.

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Ranking factors for popular explanation

  1. Money supply
    One of the primary factors is the growth in the money supply, which can outpace the growth of the economy's output of goods and services. When there is too much money chasing too few goods, the prices of those goods are pushed up as people are willing to pay more for them.
  2. Demand-pull inflation
    This occurs when demand for goods and services in an economy outpaces the supply of those goods and services. As people compete to purchase a limited quantity of items, suppliers can raise their prices, leading to inflation.
  3. Cost-push inflation
    Inflation can also be caused by an increase in the cost of inputs (like labor, raw materials, and energy) that producers use to make goods and services. If the costs of production rise, suppliers may pass these costs on to consumers in the form of higher prices.
  4. Exchange rate fluctuations
    Changes in exchange rates can impact import and export prices, and consequently, the overall inflation rate. If a country's currency weakens relative to other currencies, the cost of imported goods will increase, leading to inflation.
  5. Government fiscal and monetary policies
    Changes in government spending, taxation, and monetary policies can influence inflation. For example, an expansionary fiscal policy (e.g., increased government spending or tax reductions) can increase overall demand in an economy, leading to higher inflation. Likewise, excessive money creation by a central bank can lead to an increase in the money supply and contribute to inflation.
  6. Structural factors
    Factors such as minimum wage increases, changes in market regulations, or supply-chain disruptions may cause inflation. These structural factors influence the costs of production and overall demand, which in turn affect price levels.
  7. Inflation expectations
    If households and businesses anticipate future price increases, they may adjust their behavior (e.g., by demanding higher wages or raising prices), leading to a self-fulfilling cycle of inflation.
  8. Wage-price spiral
    Inflation can be sustained by a wage-price spiral, where higher wages are demanded to cope with rising prices, which then prompts suppliers to raise the prices of goods and services further.
  9. Global economic factors
    International events, such as commodity price shocks, trade wars, or geopolitical conflicts, can contribute to inflation by disrupting supply chains and altering the balance between demand and supply.
  10. Inertia and indexation
    In some cases, inflation may persist due to inertia, where prices and wages continue to increase even after the initial causes of inflation have subsided. Indexation, where wages and prices are automatically adjusted based on changes in inflation indices, can also contribute to this persistence.

About this ranking

This is a community-based ranking of the most popular explanation for inflation. We do our best to provide fair voting, but it is not intended to be exhaustive. So if you notice something or explanation is missing, feel free to help improve the ranking!

Statistics

  • 1309 views
  • 203 votes
  • 10 ranked items

Voting Rules

A participant may cast an up or down vote for each explanation once every 24 hours. The rank of each explanation is then calculated from the weighted sum of all up and down votes.

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More information on most popular explanation for inflation

Inflation is a phenomenon that affects the economy of every country. It refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of the currency. The most popular explanation for inflation is the demand-pull theory, which suggests that inflation occurs when the demand for goods and services exceeds their supply. This leads to an increase in prices, as businesses try to profit from the high demand. Another theory is the cost-push theory, which proposes that inflation occurs when the cost of production increases due to factors such as rising wages or raw material prices. This leads to an increase in prices as businesses try to cover their costs. While both theories have their supporters, the demand-pull theory is generally considered to be the most widely accepted explanation for inflation.

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