Causes of inflation

The main causes of inflation are:

• Increased levels of aggregate demand. Periods of strong growth in expenditure have contributed to inflation, as the economy has not been able to meet the higher demand for goods and services.
• Higher input prices. Increased prices of raw materials, semi-finished goods and capital goods have contributed to inflation.
• Inflationary expectations. If inflation is expected to rise, groups in the economy, such as trade unions and businesses, move to protect themselves against the loss of purchasing power. This adds to inflationary pressures.
• Imported factors. If the price of overseas goods increases, due to factors such as overseas inflation or a depreciation of the Australian dollar, consumers are faced with higher prices and firms are faced with higher input prices. This contributes to inflation.