why does low unemployment cause inflation?

40 views
0

why does low unemployment cause inflation?

In: 6

More people working = more people buying.

More people buying = less supply for the growing demand

More demand than supply = prices increase

Low unemployment itself doesn’t ’cause’ inflation, but its an indicator that would coincide with inflation.

Low unemployment generally means the economy is growing and booming along, and its when the economy is growing quickly and interest rates are low that you’re likely to have a lot more borrowing and creation of money supply.

And it’s that which leads to inflation.

So it’s not a cause so much as it is often correlated.

It doesn’t directly cause inflation. There have been periods with low unemployment and normal inflation levels. It can be one of the contributing factors to inflation though

When people are unemployed they generally do not have a tremendous amount of money. When people get money they can compete for goods and services–this increases demand. If supply does not increase then prices will increase.

All the replies so far have only mentioned that more people working means more money in the economy, pushing up prices

There is also the labour market side of this. In theory, when there are fewer unemployed people, wages go up because employees have more ‘power’ to negotiate higher wages. If companies have to pay higher wages, then they pass those costs on to the consumer through higher prices.