How does demand pull inflation differ from cost push inflation?
Demand pull inflation and cost push inflation are two different types of inflation
that occur due to different causes. Demand pull inflation occurs when there is
an increase in aggregate demand for goods and services that outpaces the
current supply, thereby causing shortages and driving up prices. Conversely,
cost push inflation occurs when the cost of production increases, leading to an
increase in the price of goods and services.
Demand pull inflation is characterized by an increase in demand leading to a
subsequent rise in the price level. This type of inflation is often referred to as
"too much money chasing too few goods." When there is a surge in demand,
businesses are in a position to raise their prices, leading to an increase in the
cost of living. While demand pull inflation is generally considered a positive
indicator of economic growth, it can be harmful if left unchecked. If demand
continues to outpace supply, inflation can continue unabated, leading to a
diminishing purchasing power of money.
On the other hand, cost-push inflation is driven by higher costs of production
that lead to price increases even if demand remains constant. For example,
when the cost of raw materials, labor, or production increases, businesses are
forced to increase their prices to cover the additional expenses. Cost push
inflation reduces the competitiveness of domestic producers and can lead to
inflation when foreign imports become more expensive.
In essence, the key difference between the two is the cause of the increase in
price levels. While demand pull inflation tends to occur in a robust economy
when consumers have the purchasing power, cost push inflation is more
commonly seen during times of economic contraction when prices rise despite
weak demand.
References:
- Blanchard, O. (2016). Macroeconomics. Pearson Education Limited.
- Jaeger, A. (2015). Understanding the Different Types of Inflation. Investopedia. Retrieved
from https://www.investopedia.com/articles/economics/10/types-inflation.asp
- Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.