Inflation occurs when the cost of goods and services increase over time.
Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy.
The factors which affect them are :
1) Demand-pull inflation
2) Cost-push inflation
Demand-pull inflation occurs when aggregate demand for goods and services in an
economy rises more rapidly than an economy’s productive capacity. One potential
shock to aggregate demand might come from a central bank that rapidly increases
the supply of money.The increase in money in the economy will increase demand for goods and services.
Cost-push inflation, on the other hand, occurs when prices of production process
inputs increase. Rapid wage increases or rising raw material prices are common
causes of this type of inflation. The sharp rise in the price of imported oil
during the 1970s provides a typical example of cost-push inflation.Rising energy prices caused the cost of producing and transporting goods to
rise. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level.