why does low unemployment cause inflation?
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I think it is roughly this:
* Low unemployment means that if a firm/business wants to hire, it is harder to find an employee.
* They might increase the wage/salary to try and entice someone.
* This can lead to increases in wages (this is a type of inflation, the price of labor going up)
* Increases in wages mean more people with normal/average-ish income to have more spending money.
* This encourages business to charge slightly higher for their goods and/or services (another type of inflation)
* This has the potential to end up in a bit of a feedback loop, where now that things are more expensive, workers might only work for higher wages, and the cycle could repeat.
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To help imagine how this works, try to consider the extreme alternative.
Imagine that almost everyone gets fired tomorrow (for some reason), and unemployment skyrockets instantly.
Well, now everyone will be scared to spend money, because they don’t know when they’ll get more. Only the cheapest items will be bought, encouraging businesses that make cheap items to pump out more and more, but they’d struggle to raise prices since people could buy one of the cheaper alternatives instead.
People who sell expensive items will have to derease their prices to have a chance of selling their products.
People will also be willing to take a lower paying job just to make sure they have some form of income.
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(Now, unemployment is far from only factor to inflation. However it can factor in, and I’ve tried to detail how that could happen.)
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