What are the three main drivers of inflation?

• Demand pull inflation occurs when demand in the economy rises too quickly and supply cannot keep up.

• Cost push inflation occurs when there is an increase in firms’ costs of production. Firms then look towards passing these costs onto customers through higher retail prices.

• Expectations about inflation play an important role in the formation of actual inflation. If workers think inflation will be higher, then they will try to negotiate  higher wages. If agreed, these higher wages increase firms’ costs, which leads to higher prices for consumers.