What Causes Inflation?

Inflation is not one thing with one cause. Economists group the drivers into a few channels, and most real episodes are a blend.

Demand outrunning supply

When spending grows faster than the economy can produce goods and services, prices rise to clear the gap. Big fiscal stimulus, fast money growth, or a confidence-driven spending boom can all push demand past the economy's capacity. This is demand-pull inflation.

Cost (supply) shocks

Sometimes prices rise because production gets more expensive: an oil shock, a supply-chain breakdown, a crop failure. These cost-push shocks raise inflation and reduce output at the same time, which is what makes stagflation possible.

Money growth

Over the long run, persistently printing money faster than the economy grows shows up as inflation (the quantity theory of money). But it is not automatic in the short run: extra money can be absorbed by higher output or by changes in how fast money circulates.

Expectations

Inflation is partly a belief that feeds itself. If people expect higher prices, they raise their own prices and wages ahead of time, making the inflation real. That is why central-bank credibility matters so much.

The mechanics behind all of this are captured by the Phillips curve (slack and expectations), the Taylor rule (how the central bank responds), and the quantity theory of money.