What causes inflation?

Inflation is a sustained rise in the general price level. In simple words, prices across the economy keep going up over a period of time. If just one product becomes more expensive, that alone is not inflation.

Demand-pull inflation happens when total spending in the economy grows faster than the amount the economy can produce. Spending might rise because households feel confident, loans are cheap, taxes are cut or the government spends more. If firms are already producing close to their limit, they can't make much more. So they raise their prices instead.

Cost-push inflation happens when the cost of making goods and services goes up. Firms pass the extra cost on to customers by raising prices. Costs can rise when wages go up faster than productivity (output per worker), or when imported fuel and raw materials cost more. A fall in the value of the currency also makes imports more expensive. With cost-push inflation, output can fall while prices rise.

The cause matters because it changes which policy works. For demand-pull inflation, the usual answer is to reduce spending. The central bank can raise interest rates, or the government can raise taxes or cut its own spending. For cost-push inflation, cutting demand doesn't deal with the cause. Prices may rise more slowly, but output falls further and unemployment can go up. Supply-side policies that lower costs or raise productivity target the cause, but they take longer to work.

In an exam answer, first say which type of inflation the question describes, and use the information given to show how you know. Then link that type to the policy in the question. That link gives you a clear evaluation point. If you're studying AS or A Level, you can also show both types on an AD/AS diagram: demand-pull as AD shifting to the right, and cost-push as AS shifting to the left.