Causes of inflation in the economy can be divided into three main groups:

1. Increased demand: When demand for goods and services exceed what producers can supply, some will be willing to pay more to obtain the goods and services they want. Prices then rise as a result of increased demand.
2. Increased costs: Rising costs of producing goods and services rise will often cause producers to raise their prices. Higher production costs may, for example, be due to higher wages for producers' employees or higher raw materials prices owing to shortages.
3. Expectations: What people believe about prices ahead can impact prices today. For example, if a business expects the cost of producing a good or service to increase in the future, the business may start raising selling prices today to cover the higher expected costs. The same applies when employees expect rising prices next year and therefore demand higher wages in this year's wage negotiations to maintain their purchasing power.

What is a wage-price spiral?

If inflation remains high over time, price pressure from all these driving forces may make themselves felt at the same time. At worst, the economy can enter a self-reinforcing spiral of continuously rising prices and wages that is very painful to break out of.

In the 1970s and 1980s, Norway and several other countries went through such a period of high inflation. To break out of the spiral, the authorities had to forcefully intervene to cool the economy through high interest rates and lower public spending. In the wake of these measures, the economy went through a period of high unemployment and financial turbulence.

To avoid ending up in such a situation again, Norges Bank has been tasked with preventing inflation from becoming entrenched at a high level.