What primarily causes inflation?

Inflation is primarily caused by two key factors: demand-pull inflation and cost-push inflation.

Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the supply. This increased demand can drive prices up as consumers compete for limited products, leading businesses to raise their prices. Factors that contribute to this demand include increased consumer spending, government spending, and investment from businesses.

Cost-push inflation, on the other hand, happens when the costs of production rise, prompting producers to pass on these higher costs to consumers in the form of increased prices. This can be caused by rising wages, increased prices for raw materials, or supply chain disruptions.

The combination of these two forms of inflation captures the complexity of how price levels can rise in an economy, recognizing that both demand-side and supply-side factors play crucial roles in this phenomenon. Thus, the correct answer is rooted in the fundamental economic principles that underpin inflationary causes, highlighting the interplay between supply and demand in influencing price levels.