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The Causes of Inflation There are three major causes of inflation: 1. Demand - pull inflation 2. Cost - push inflation 3. Monetarist Theory 1. Demand - Pull Inflation This type of inflation is caused by excess aggregate demand, exceeding aggregate supply. Quite simply 'too much demand is chasing too few goods'. This can occur when the growth in aggregate demand is so strong, that aggregate supply cannot respond quickly enough - resulting in prices getting bidded-up. Thus surges in aggregate demand can ( not necessarily always ) lead to greater inflationary pressures as bottle necks in supply are caused ie supply simply cannot respond quickly enough !! Demand - pull inflation is also more likely to occur when the economy is approaching full employment, and unemployed resources are becoming more scarce ie where aggregate demand is quite strong and there is only a small negative output gap ( AD is on the inelastic section of AS...

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