2. Fiscal deficit
A fiscal deficit is a situation in which a government’s expenditures are greater than its revenues. This deficit could be financed with a loan from the central bank. To do this, the central bank would have to increase the monetary base, understanding the latter as the sum of banknotes, coins and the balance of the single bank account. This would cause an increase in the price level.
3. Inconsistent Policies
Even when the policies to maintain the price level are apparently correct, there is the possibility that some of them generate some inertia on inflation. An example of the above could occur if wages were indexed to last year’s inflation, and that inflation was high. The previous situation would generate that wages would also be high, since they are indexed to past inflation and since these are a determinant of inflation, it would also increase. The above process is known as the inflationary spiral.
short term inflation
1. Aggregate supply contraction
Aggregate supply is the total volume of goods and services produced by an economy. Thus, when there is a decrease in aggregate supply due to increased costs associated with production processes (for example, an increase in the price of oil), companies increase their prices to maintain their profit margins.
2. Increase in aggregate demand
Aggregate demand is the volume of goods and services required by an economy. Therefore, an increase in aggregate demand greater than the goods and services that the economy can produce, causes an increase in prices, since there is a lot of money chasing few goods. What happens in this case is that many consumers buy more goods and services than before, noticing this phenomenon, companies increase the prices of their products, which causes inflation.
