Question

Evaluate likely reasons for persistent inflation in recent decades

Short answer

The two main origins of inflation are excessive aggregate demand (AD) (excessive economic growth) and cost-push forces (supply-side factors).

Step-by-step solution

Definition for Persistence inflation 

Inflation is defined as a steady rise in the price level.

The potential for price shocks to push the inflation rate away from its steady state—including an inflation target—for a long time is known as inflation persistence.

Persistence is essential because it has an impact on the output costs of deflationary policies.

Reasons for persistent inflation in recent decades 

Excess aggregate demand (AD) (excessive economic growth) or cost-push forces are the two main sources of inflation (supply-side factors).

Demand-pull inflation occurs when aggregate demand outpaces aggregate supply (growth too rapid)

Cost-push inflation, for example, occurs when increasing oil prices lead to greater costs.

Depreciation - increases the cost of imported goods while simultaneously increasing domestic demand.

Rising wages boost employers' costs and consumers' disposable income, allowing them to spend more.

Inflation expectations - A high level of inflation expectations encourages workers to demand salary increases and businesses to raise pricing.