If demand-pull inflation is driven by elevated demand for goods or services, cost-push inflation is when a supply shortage leads to higher prices. When demand for goods or services rises faster than the supply of those goods and services, the result is demand-pull inflation. The interplay of supply and demand helps set the prices of goods and services in an economy.
Covid-19 Pandemic Demand
In 2022, inflation rates around the world rose to their highest levels since the early 1980s. While there is no single reason for this rapid rise in global prices, a series of events worked together to boost inflation to such high levels. An optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving. If the purchasing power of money falls over time, there may be a greater incentive to spend now instead of saving and spending later. It may increase spending, which may boost economic activities in a country. A balanced approach is thought to keep the inflation value in an optimum and desirable range.
Impact on Economic Growth
A company that creates a new technology owns the market until other companies figure out how to copy it. People will demand products with technologies that create real improvement in their daily lives. The new technology also creates a cachet for those who must own the latest gadget.
However, the country could only produce 2,000 cars per month and 1,500 refrigerators per quarter. Conversely, if the inflation rate becomes negative, that means that prices are falling. This is known as deflation, which can have negative effects on an economy.
How it occurs
As Aggregate Demand increases from AD1 to AD2, the output increases from Q1 to Q2. At the same time, the Price level also rises from P1 to P2 causing inflation. Demand-pull inflation emerges when consumer demand surges beyond available goods and services, elevating the general price level in an economy. To understand demand-pull inflation, let’s consider the case of a growing economy. As an economy grows, employment and income levels increase, leading to higher consumer confidence and more disposable income. Consumers start demanding more goods and services, leading to an increase in AD.
Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Technological innovations can also contribute to demand-pull inflation. Economists use a mixture of the consumer price index (CPI), the producer price index (PPI) and the personal consumption expenditures price index demand pull inflation meaning (PCE) to measure inflation in the U.S.
What is deflation?
- Demand-pull inflation fundamentally alters the ability of consumers to purchase.
- Demand-pull inflation can be contrasted with cost-push inflation, whereby higher costs of production are passed on to consumers.
- Although there were many other reasons for the housing bubble, they wouldn’t have been as attractive without government fiscal policies.
- However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales—ultimately eroding the profits they were trying to protect.
From a historical perspective, demand-pull inflation phenomena, evident in events like the late 1980s inflation escalation in the UK and the late 1960s in the US, have been witnessed. These occurrences were fueled by factors including brisk economic expansion, bolstering consumer morale, and the adoption of expansionary measures. Alternatively, governmental bodies can also engage in contractionary fiscal protocols to manage the perils of demand-pull inflation. These actions might encompass tax hikes, budgetary reductions, or a synthesis of both strategies. Positioned to reduce demand aggregation within the economy, these endeavours restrict the consumer’s power to elevate product valuations.