Joseph Birkenstock, age 10, of River Hills, Wis., for his question:
WHAT CAUSES INFLATION:
When the demand for production goes up and items become scarce, manufacturers raise their prices to match what the people are willing to pay. Prices seldom go back down, even if money becomes scarce and the demand for the product does not continue high. When the prices go up, it is a time of economic inflation. And a decline in production is called a recession.
Basically, a period of economic inflation is a time of rising prices and a period of deflation is a time of falling prices. If the decline is not serious, it is often called a recession. During an inflationary period, a set amount of money buys less than it did before. During a period of deflation, it buys more than it previously did.
A time of war or a period of reconstruction is often accompanied by a period of inflation. A steady, unlimited demand for goods of all kinds tends to create a pressure in the economy. This pressure tends to become inflationary if the total demand is not counteracted by some economic measure such as raising taxes or imposing price controls.
Price controls and rationing were imposed by the U.S. government during World War II. After the restrictions were removed, inflation occurred. People who had saved their money during the war wanted new automobiles and other products as well as better ways of life. Similar inflationary cycles happened during and after the Korean and Vietnam wars.
Demand pull inflation is a term economists use to describe a situation in which the demand for goods and
services exceeds the supply. This happens because business, consumers and the government all want to buy more goods and services than the economy can produce. Demand pull inflation stops when the supply matches the demand.
A matching of both supply and demand happens for one of two reasons: the manufacturers build new factories and hire more workers to make more goods and increase the supply, or the demand itself decreases.
A cost push inflation or a wage price spiral happens when inflation persists even though the demand for production does not exceed the supply. Workers then find their ability to buy goods and services has not kept up with the cost of living and they bargain for higher wages. Employers grant the wage increase and pass along the resulting increase by raising the price they charge consumers.
Those who suffer most from periods of inflation are those who live on fixed pensions. They find their income buys less and less each month. Banks and other money lending institutions also suffer during an inflation since money lent at the beginning of a loan period buys much less when it is repaid.To curb inflation, many experts say, a government mustcut down on its own spending.