Demand Pull Inflation - Explained
What is Demand Pull Inflation?
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Table of ContentsWhat is Demand-Pull Inflation?How does Demand-Pull Inflation Work?Demand-Pull Inflation in Contrast With Cost-Push InflationCauses of Demand-Pull InflationAcademic Research on Demand-Pull Inflation
What is Demand-Pull Inflation?
Demand-pull inflation is an economic situation that occurs when the demand for goods and services is more than the supply of goods or services. In an economy, when aggregate demand outpaces aggregate supply, it means there is an imbalance and this creates demand-pull inflation. Demand-pull inflation often results in an increase in the price of goods and services which emanates from higher demand than supply. As the name implies, this type of inflation is caused by an imbalance between aggregate demand and supply.
How does Demand-Pull Inflation Work?
Demand-pull inflation is a major concept in Keynesian theory, in this type of inflation, aggregate demand outweighs aggregate supply leading to a rise in the price of goods and services which extends to the entire economy. Due to the inability of the goods supplied to meet demands, there is an increase in the price of the goods supplied. Due to a rise in the demand for goods, companies recruit more employees in order to increase their outputs. This means unemployment rate is reduced in this economic situation. However, despite that companies increase their outputs, the outputs are insufficient to meet demands, leading to a rise in price.
Demand-Pull Inflation in Contrast With Cost-Push Inflation
Demand-pull inflation centers around an increase in the price of goods and services resulting from the demand of consumers being more than the supply of goods. Cost-push inflation is different from demand-pull inflation, in cost-push inflation, the price of goods and wages earned increase and revolved around sectors of an economy. While it is quite easy to nip demand-pull inflation in the bid, cost-push inflation requires more technical efforts as it becomes seemingly difficult to curb.
Causes of Demand-Pull Inflation
The major causes of demand-pul inflation are highlighted below:
- An increase in government spending: When this happens, it means the government opens up more money in the economy and consumers have access to more money to buy goods and services, due to the sufficiency of money, demand gradually begins to outweigh supply.
- Inflation expectation: when companies perceive inflationary trends in an economy, they can increase the prices of goods and services.
- An increase in exports, materials, and assets needed by companies to make production.
- Economic growth is another factor that can lead to demand-pull inflation.
- Circulation of more money in an economy or when there is excess money available to consumers.