Inflation, Deflation and it's cause in Economy

Inflation
Purchasing power of people expands with increase in money income supply of goods and services doesnot increase to the same extend. This brings about the economic disequilibrium, which is known as inflation.
There are various reason of inflation. Inflation occurs due to the following reasons:
1. Demand- pull inflation
If the aggregate demand for goods and services exceed the supply of these goods and services, it is called damand-pull inflation. It occurs due to the following reasons which are given below:
a) Reduction of taxation: If the government reduces the rates, it will increase purchasing power of people due to increase in disposable income of people. Consequently, the consumption expenditure and inflation occurs.
b) Miscellaneous: There are other of demand-pull inflation, such as increase in private expenditure, shortage of goods and services in the market, increasing the volume of exports, repayment of debts etc. all above mentioned factors creates the problem of excess of demand over supply of goods and services and finally inflation occurs.

2. Cost-push inflation: If the price of commodities rises due to the rise in cost of factors and raw materials, the inflation is called cost-push inflation. In cost push inflation, general price will be high and aggregate supply will be low as compared to aggregate demand for goods and services. Following are the causesof inflation;
a) Increase in wages: Sometimes price of goods and services increase rapidly due to rise in wage rate of labor. If the trade unions are strong in the country, they demand more wages to maintain real wages which increases the cost of production and inflation occurs, which is also known as wages push inflation.
b) International reasons: In the context of international trade, most of developing countries like Nepal are dependent on for raw materials, fuel energy, consumer goods etc. If the price of such goods increases in foreign country, obviously the price of such products increases in the country.


Deflation
Price decline adversely affects employment condition. It creates unemployment which brings deflation. It is also known as disinflation.
Following arethe causes of deflation:
1. Decrease in money supply: Deflation occurs due to the low supply of money in the economy. When the central bank or other financial institutions does not issue sufficient amount of money in comparison to goods and services produced in the economy, then there will be less velocity of money or circulation of money and finally deflation occurs.
2. Control of credit: One of the major functions of central bank is to control on credit creation to the commercial banks. The notice may circulate by central bank to commercial banks for increasing the ratio of cash reserved fund. It creates the deflation in the economy.
3. Increase in Tax Rate: Sometimes government may impose high direct tax rate to the people due to various reasons such as control on inflation, increase in public expenditure, fulfilling war and emergency expenses etc. The high burden of tax on people lacks the circulation of money in the economy, which creates deflation and as a result deflationary situation appears in the economy.