What primarily causes inflation?

Inflation primarily results from two significant factors: demand-pull inflation and cost-push inflation. Demand-pull inflation occurs when the demand for goods and services in an economy outstrips their supply. When consumers have more money to spend and confidence in their economic situation, they increase their demand. This heightened demand can drive prices higher, especially if the supply cannot keep pace.

On the other hand, cost-push inflation occurs when production costs for businesses increase, leading them to raise prices for their products and services to maintain profit margins. This can stem from various factors such as wage increases, rising prices for raw materials, or supply chain disruptions. Both forms of inflation illustrate how the interaction between demand and supply dynamics within an economy can lead to rising price levels.

The other options do not encapsulate the primary drivers of inflation as effectively. For instance, increased savings rates among consumers tend to lead to lower demand, which would not directly cause inflation. Higher import tariffs can influence inflation by raising the cost of foreign goods but are not the primary causes of inflation in general. A reduction in consumer spending typically results in decreased demand, which can lead to deflation rather than inflation. Thus, the combination of demand-pull and cost-push factors provides a comprehensive