Internal and External Causes of Inflation

The inflation It mainly refers to the increase in prices of goods and services within the economy during a certain period of time.

The main inflationary causes are directly related to aggregate demand due to rapid economic growth, when consumers have a persistent interest in a product or service, and by various factors that drive the pressure of prices to favor the supply and in turn affect the cost of life.

The impulse of demand occurs when the increase in demand in goods and services forces producers to raise prices in order to generate higher profits. This price increase occurs due to the high cost in production, which includes the price of materials and the increase in workers' wages.

Internal and external causes of inflation

Most capitalist economies seek to use finance capital as a general equilibrium of goods and services, which indicates the importance of money for the circulation of products correspondent.

Despite this, the existing money could cause some difficulties such as inflation, which can occur due to internal and external causes, as we will see below.

Internal causes of inflation

The most important internal causes are:

• The excessive entry of paper money linked to the need for the movement of goods and services.
• The high aspiration for profit interest on the part of industrial capitalists and commercial capitalists.
• The imbalance in the conduction of financial credits that disadvantage the various production investments that lead to speculative processes.
• The devaluation of the monetary system.
• Insufficient supply of agricultural products that are related to demand.
• The existence of speculation and accumulation of goods.
• Increase in interest rates within the banking system that lead to the limitation of credits.
• The curved line of prices and wages.
• The lack of offers in industrialized goods with respect to demand.
• The inflationary process due to the impulsive behavior of consumers.

External causes of inflation

Among the external causes we have:

• Fluidity in excess of external capital, either in a credit way or in the form of investments that are not linked to the production process.
• Import of large quantities of products with excessive prices.
• Very high service of the external debt, which prevents an internal formation that favors capital for production.
• The excess of exports of different products that allow an increase in the entry of foreign currency to the country and in turn, allows the continuous circulation of large amounts of money.
• Global commodity hoarding and speculation, especially those products that are related to food and oil.

Other factors affecting inflation

There are some general causes of inflation that can cause an increase in it, for example:

Maximize home prices

The rise in housing prices does not produce direct inflation, however, it allows a positive effect to occur that promote wealth and buyer-driven financial growth, which can cause demand inflation in a way hint.

Increase in taxes

If the government raises excise taxes or VAT on businesses, prices are much higher. Despite this, it is possible that the increase in these taxes contains a single increase and as the total value for producers and sellers, the price of the product will increase to achieve a minimum impact on their Profits.

Salary increase

When unions come together, it is most likely that wage increases can be negotiated, resulting in a cause significant in cost inflation, since workers' wages are the highest costs in most of the Business.

Population index growth

As the population index increases, the total demand within the market also increases, causing excessive demand, generating an increase in the inflationary system.

When talking about internal and external causes of inflation, we must bear in mind that inflation will always be present where there is a monetary economy where money circulates continuously, since that it is a structural situation of the capitalist system that over time could affect companies, the market and consumers.