What Causes Inflation and Who Profits From It?

What Drives Inflation?

There are various factors that can drive prices or inflation in an economy. Typically, inflation results from an increase in production costs or an increase in demand for products and services.

Cost-Push Inflation

Occurs when prices increase due to increases in production costs, such as raw materials and wages.

The demand for goods is unchanged while the supply of goods declines due to the higher costs of production.

As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.

Demand-Pull Inflation

can be caused by strong consumer demand for a product or service.

Consumer confidence tends to be high when unemployment is low, and wages are rising—leading to more spending.

Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to a high demand for products and services.

The Housing Market

If homes are in demand because the economy is experiencing an expansion, home prices will rise.

The demand also impacts ancillary products and services that support the housing industry.

Construction products such as lumber and steel, as well as the nails and rivets used in homes, might all see increases in demand resulting from higher demand for homes.

Expansionary Fiscal Policy

If a government cuts taxes, businesses may spend it on capital improvements, employee compensation, or new hiring.

Consumers may purchase more goods as well. The government could also stimulate the economy by increasing spending on infrastructure projects.

The result could be an increase in demand for goods and services, leading to price increases.

Who Benefits From Inflation?

While consumers experience little benefit from inflation, investors can enjoy a boost if they hold assets in markets affected by inflation.

For example, those who are invested in energy companies might see a rise in their stock prices if energy prices are rising.

Some companies reap the rewards of inflation if they can charge more for their products as a result of a surge in demand for their goods.

If the economy is performing well and housing demand is high, home-building companies can charge higher prices for selling homes.

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