Inflation is an increase in the prices of goods and services in an economy. There are various factors that can drive prices or inflation in an economy. Typically, inflation results from an increase in production costs or an increase in demand for products and services. The main causes of inflation can be grouped into three broad categories: demand-pull, cost-push, and inflation expectations.

• Demand-pull inflation: This is caused by developments on the demand side of the economy. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product. When this happens across a large number of businesses and sectors, it leads to an increase in inflation.

• Cost-push inflation: This is caused by the effect of higher input costs on the supply side of the economy. Cost-push inflation occurs when the total supply of goods and services in the economy which can be produced (aggregate supply) falls. A fall in aggregate supply is often caused by an increase in the cost of production. If aggregate supply falls but aggregate demand remains unchanged, there is an increase in the price level.

• Inflation expectations: This is when households and businesses think that prices will rise in the future, which can influence actual prices in the future.

Monetarists understand inflation to be caused by too many dollars chasing too few goods. In other words, the supply of money has grown too large. According to this theory, moneys value is subject to the law of supply and demand, just like any other good in the market. As the supply grows, the value goes down. If the value of money goes down, its purchasing power drops and things become relatively more expensive.

Inflation can also result from supply shocks, which are major disruptions to an important economic input, like energy. For example, if there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, it can contribute to demand-pull inflation.

In summary, inflation can be caused by a mix of output, money, and expectations. Supply shocks, cost-push inflation, demand-pull inflation, and inflation expectations are all factors that can drive prices or inflation in an economy.