The situation in which government spending exceeds its revenue is called deficit financing. Additional expenses in the budget deficit is met through deficit financing. Due to funding shortfalls in the money supply in the country increases, but the production does not increase at the same rate so the price starts to rise and triggering inflation.
Increasing the money supply
Huge increase in money supply is also a main reason of inflation. The money supply increases due to several reasons, such as bank rates low, financing the deficit, declining reserve ratio, etc. Because of the money supply increased the amount of cash with the people and banks increases. Thus commercial banks offer more loans to people of lower interest rates and on the other hand, the people will demand more goods and services due to the availability of cash. Due to increased demand for goods and services, prices start to rise and thus cause inflation.
Increased Development Costs and Development
Development expenditure and development of government also lead to inflation. For example, no development costs such as defense spending, official foreign visits of government, increased the salaries of public employees, and so drives the economy an inflationary situation. Moreover in most of the production of development projects started many years after the money has been spent. This type of development projects is also a source of inflation.
Rapid population growth is also a major cause of inflation. With the increasing public demand for goods and services also increases but supply does not increase at the same pace. Due to the imbalance between supply and demand of goods and services, prices start to rise and triggering inflation.
The Currency Devaluation
The devaluation of the currency relates to the reduction of the external value of the currency of the monetary authorities through an official order. When the local currency depreciates against foreign currency, then the prices of imported goods will increase. These imported products are used in various factors of production and ultimately increase the cost of production. Due to increased production costs begin to increase prices and cause inflation. This type of inflation is called cost inflation push.
Political stability is very important for the economic development of a country. Political stability discourage speculation and hoarding and encourages investment. If there is an unexpected twist in the political situation of a country become entrepreneurs reluctant to invest. Just as foreign investors do not invest, while industrialists and businessmen feel uncertain and can not make good plans. Due to the scarcity of goods and services are produced and cause inflation.
Various illegal activities such as smuggling, black market, hoarding etc impeding economic growth and the causes of shortage of supply for domestic use. In cases of hoarding often artificial scarcity of essential items is created and charged huge profits. Here it should be noted that income from these sources not used in productive activities and not inadvertently spent on luxury items, jewelry, speculation, consumer goods, etc. Because of the increased spending, the demand for goods and services increases and thus causes inflation.