People talk about inflation as the rise of everyday prices, but understanding the causes of economic inflation is important, as it allows you to get an idea of the relationship between the economic forces that shape modern life. Generally, inflation is defined as the current rate of increase in prices for goods and services, but there is much more to inflation that can be mathematically measured. This is actually the result of the causes of economic inflation.
Since money has no value by itself (it's just pieces of paper and coins), the value of money comes from what people will trade for it in goods and services. This gives money its value. When a certain amount of money is measured against what it could purchase a set time ago versus what it can purchase now, that measurement is inflation.
One of the common causes of economic inflation is the high growth rate of the supply of money that increases faster than the economy can grow. Banks put more money into the economic system when they lower interest rates, making it more attractive for people and businesses to take out loans. They also put more money into the system when they purchase treasury bills and extend lots of credit.
When there is too much money into the system without an increase in production or economic growth in general, prices for things go up-or inflation. When there is a lot of money out there, society attaches a smaller value to it and spends more of it. The value of money is effectively diluted. When income doesn't keep up with the rate of inflation, then purchasing power goes down. When this happens, the inflation rate goes down, or that the value of money is being diluted more slowly.
Another of the causes of economic inflation is the rise in the cost of what it takes to produce things. This rise in production costs can occur, for example, when raw materials cost more to purchase, therefore the high costs are passed on down the line to the manufacturers and then to the retailers and ultimately on to consumers. In order to keep making a profit, the high costs are passed on.
Major spending by the government for a crisis is also another common cause of economic inflation. Whether it's to recoup the cost of a war effort, combating an off-balance exchange rate or a raise in taxes to pay for federal programs, an increase in prices is often noticed as a result.
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