What is identified as the root cause of inflation?

Inflation can be fundamentally understood as a situation where there is an increase in the general price level of goods and services over time. The concept that "more money chasing fewer goods" directly addresses a significant mechanism of inflation. When the money supply increases and there are not enough goods and services available to meet the heightened demand, prices naturally rise. This imbalance leads to inflation, as consumers are willing to pay more for limited products, driving up the overall price level.

This explanation underscores the relationship between the quantity of money circulating in an economy and the availability of goods. If the supply of money grows faster than the production of goods, inflation is likely to ensue as too much money is available for too few goods, creating upward pressure on prices.

In contrast to this, while high demand for goods may contribute to inflation, it is the interaction between increased money supply and limited goods that serves as the root cause. Increased production costs might affect individual prices of specific goods or services, but they do not encompass the broader concept of inflation. Government spending can drive demand and thus contribute to inflation, particularly if it leads to higher deficits that increase the money supply, but it is not itself the primary driver of inflation as described by the core principle.