Definition
- Demand-pull inflation
- Demand-pull inflation is a rise in the price level caused by aggregate demand growing faster than the economy's ability to supply output.
- Not to be confused with: Cost-push inflation
- Cost-push inflation is a rise in the price level caused by higher input prices, such as oil or labour, across most firms.
Example
Can you think of one cause of each type of inflation before you look?
In one year households borrow cheaply and spend heavily, firms run flat out and cannot hire enough staff, and prices rise 5 per cent while real output grows 3 per cent: demand-pull. In another, the world price of oil doubles, energy and transport costs rise for nearly every firm, and prices rise 5 per cent while real output falls 1 per cent: cost-push.
Test yourself
What is the difference between demand-pull inflation and cost-push inflation?
Demand-pull starts with spending and raises output with prices; cost-push starts with costs and cuts output as prices rise.