Inflation is a dynamic disequilibrium phenomenon. A once for all rise in price is not inflation. Inflation is a situation of continuous price rise. A mild price rise is not alarming, but what concerns most Government is the situation of continuous price rise, a situation that was observed during the Second World War.
Inflation is an evil. Its impact is uneven on the members of the community. It makes rich richer and poor poorer. That is to say Inflation has a tendency to redistribute income in favor of the people of high income group as the cost of low income group. This regressive redistribution of income consequent upon inflation is certainly not desirable and hence the Government seeks to adopt measures with a view to combat this evil.
Early economists were of the view that increased money supply was the only cause of inflation. Had money supply been the only cause of inflation, controlling it would not have been a problem because by adopting monetary and fiscal policies, the Government could have curtailed money supply and could have controlled price rise and therefore inflation. But in reality it is seen that even after adopting proper monetary and fiscal policies inflation persists in the economy. This is because; there are two other factors that contribute to inflation. We call them the demand pull factor and the cost push factor.
Normally demand pull inflation occurs during an abnormal situation like war. During war, what happens is that demand remaining unchanged, production decreases due less attention on agriculture and industry and more and more attention in politics and war and so there arises an excess demand in the market. This excess demand in the market pulls up the generally price to abnormally high levels.
Cost push inflation generally occurs because of increased cost of producing goods. If the remuneration of any of the four factor of production (land, labor, capital, entrepreneurship) rises, the cost of production rises leading to an increase in the price level which may result in inflation.
