When the increase in the money supply is not justified by a corresponding increase in real output growth, inflation is a likely result. In an ideal situation, the money supply will match the growth rate of real output and prices will remain the same thereafter. Practically, however, it is very difficult to offset inflation perfectly with changes in the money supply. This is because the money supply process can really only react to inflation rates.
Another reason that the money supply cannot effectively be manipulated to control the money supply is that it is impossible to estimate the velocity of circulation. This changes for a variety of reasons that are not fully predictable. The velocity of circulation can completely offset the introduction of new money since money that is out of circulation is effectively not in the money supply.
This is the name given to the phenomenon when the demand for a particular product or service exceeds the available supply. This allows producers to increase their prices, leading to inflation. The initial response to increased demand is usually increased supply. However, when the supply becomes unable to keep up with the rise in demand, the natural conclusion is known as demand-pull inflation.
This is the most common and well-understood cause of inflation. This happens especially often when there is an elasticity of demand and producers have a fair understanding and control of market factors. For example, if there was a sudden increase in demand for air purifiers, but the supply falls short, sellers and manufacturers of air purifiers will be able to raise their prices to make maximum profit. Demand-pull inflation is usually the result of a trend that changes the way a product or service is perceived by prospective consumers.
When there is a decrease in supply or the cost of supplying a product or service, the suppliers in a market tend to raise their prices because they know that there are consumers who will pay for it. This is a phenomenon of inelastic demands. A classic example of this would be saffron. It is extremely expensive but still thrives in the market as a must-have item. If the production of saffron were to suffer, producers could easily raise their prices and consumers will still purchase.
The increase in the costs of supplying a product or service can be attributed to the costs of increased salaries, raw material prices, and other economic trends. For an IT company, cost-push inflation exists because of yearly increments and increases in the cost of human resources. When this increase is disproportionate to the market supply, there is higher cost-push inflation.