inflation is a rise over time in the general level of prices. this is
typically caused when the amount of money available in an economy
increases beyond the point where people (or companies) have cash in
excess of their projected need to retain cash. in english, people have
more money then they need so they spend it. if everyone starts
spending at the same time the extra money seeking the supply of goods
will increase prices.
having said that i would suggest that the answer to your question is
true. inflation can happen for a variety of reasons. short term price
rises can happen for demand or supply reasons. for example,
international politics have temporarily removed petroleum from iraq
and venezuela from the market. the supply has been reduced. making the
increase in price a supply side issue. on the other hand, as interest
rates decrease and and home owners refinance their mortgages they
create new disgressionary income. if they all decide to spend this new
source of funds rather than store (save)it. all the new capital now
seeking goods and services could result in price increases, such as
the rapid rise in home prices over the last few years. this new
capital, while again temporary, is certainly a demand side inflation.
long term inflation on the other hand, the kind that is persistant in
an economy for years is different. this type of inflation left
unchecked will eventually result in panic as people desperately try to
spend the money before it loses even more value. in the extreme this
is follwed by monetary collapse. this is almost invariably a demand
side phenomenon. this long term inflation almost always has its root
in rapid monetary expansion by a government through its central bank
policies. |
