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Inflation — a sustained rise in the general price level — has three main explanatory frameworks. Demand-pull inflation occurs when aggregate demand in an economy exceeds its productive capacity: too much money chasing too few goods. This can be triggered by loose monetary policy (central banks holding interest rates low and expanding the money supply), large fiscal stimulus, or strong export demand. Milton Friedman's famous dictum "inflation is always and everywhere a monetary phenomenon" captures the long-run link between money supply growth and prices. Cost-push inflation arises when production costs rise independently of demand — oil price shocks, supply chain disruptions, or wage increases — and firms pass the costs on to consumers. Built-in (or wage-price) inflation occurs when workers expect future inflation and demand higher wages pre-emptively, which then feeds into prices, creating a spiral. Central banks typically target around 2% annual inflation as a balance: enough to avoid deflation (which discourages spending and investment) while preserving purchasing power. They manage inflation primarily through interest rates — raising rates reduces borrowing and spending, cooling demand.
answered by Omniscientia Team · 174 words · 18 Mar 2026