What Is the Definition of Demand-Pull Inflation?
This can be caused by a number of factors, including an increase in population, an increase in government spending, or an increase in the money supply.
Demand-pull inflation results when aggregate demand increases enough to exceed the productive capacity of the economy.
When demand for goods and services increases faster than the ability to produce them, prices will start to rise as businesses try to make a profit.
Factors Affecting Demand-Pull Inflation
There are a number of different factors that can cause demand-pull inflation. Some of the most common causes include:
As the population grows, there is an increased demand for goods and services. This can lead to an increase in demand-pull inflation.
The government can also play a role in causing demand-pull inflation by increasing its spending. When the government spends more money, it increases the amount of money in circulation and puts pressure on prices to rise.
The money supply can also contribute to demand-pull inflation. If the money supply is increased by the central bank, consumer spending and aggregate demand increase as well.
When there is more money available to spend, each individual dollar has less purchasing power.
Demand-pull inflation can result when this happens because consumers will be willing to pay more for goods and services than before as they have access to more money with which to make purchases.
Expectations of Inflation
Expectations of Inflation in the future can also contribute to demand-pull inflation. If consumers expect prices to continue increasing, they will be willing to pay more now so that they can remain competitive in the future.
Increased Demand for Commodities
Increased Demand for commodities, particularly fuels and metals, can revise inflationary pressures as well. This is due to the fact that it costs businesses more money to produce these items when demand is high and suppliers are scarce.
Technological innovations can also contribute to demand-pull inflation. When new advancements are made, the cost of production increases as businesses need more resources to create these products.
How Demand-Pull Inflation Affects the Economy
When demand-pull inflation occurs, it can have a number of negative effects on the economy.
Increase in Prices
Higher Unemployment Rates
Second, demand-pull inflation can lead to higher unemployment rates as more people are competing for fewer jobs.
Finally, demand-pull inflation can also lead to stagflation. Stagflation is a period of slow economic growth and stubbornly high prices that usually occurs when monetary policy fails to stimulate economic growth.
When this happens, businesses will need to increase prices in order to balance supply with demand.
How Demand-Pull Inflation Affects Consumers
Increase in Cost of Living
For consumers, demand-pull inflation is mostly a negative thing. Demand-pull inflation causes prices to rise, which increases the cost of living and makes it harder to make ends meet on a daily basis.
Unemployment Rates and Wage Stagnation
Demand-pull inflation is also a factor in unemployment rates and wage stagnation.
Demand-Pull Inflation vs. Other Types of Inflation
Demand-pull inflation is different from other types of inflation in several ways.
Demand-Pull Inflation vs. Cost Push
Inflation Demand-pull inflation occurs because there is too much demand for a product or service, while cost push inflation occurs when costs rise – no matter the level of demand at that specific time.
Demand-Pull Inflation vs. Supply-Pull Inflation
Demand-pull inflation is different from supply-pull inflation because it only occurs when demand increases. Demand-pull inflation can be caused by increased spending, for example.
Supply pull inflation, on the other hand, occurs when there is an increase in the price of resources due to scarcity.
Demand-pull inflation also differs from cost-push inflation, which occurs when the price of raw materials increases due to increased costs of production.
Demand-Pull Inflation vs. Demand-Side Inflation
Demand-pull inflation is different from demand-side inflation because it only takes into account the demand side in deciding whether there is inflationary pressures in an economy. Demand-side inflation is a broader term that includes demand-pull, cost-push and supply-side inflation.
How to Tell if You Have Demand-Pull Inflation
There are a few ways to tell if you have demand-pull inflation.
One way is to look at the level of prices in the economy. If prices are rising, it is an indication that demand-pull inflation is present.
Another way to tell if you have demand-pull inflation is to look at the level of unemployment in the economy. If unemployment is high, it is likely that demand-pull inflation is also present.
Finally, you can also look at the rate of economic growth. If economic growth is low, it is likely that demand-pull inflation is also present.
How to Avoid Demand-Pull Inflation
There are several things you can do to avoid demand-pull inflation in your own life.
First, make sure you are aware of the signs of demand-pull inflation. If you see any of the signs of inflation, it may be time to rethink your spending habits.
Second, make sure you are aware of the causes of demand-pull inflation. Demand-pull inflation can affect you because you might not know what is causing it. This will help you better understand why prices are rising and will allow you to avoid certain products or services that are causing the problem.
Third, make sure you are saving your money. Demand-pull inflation can make it difficult to save your money, but it is important to do so in order to protect yourself from its effects.
Fourth, make sure you are spending your money wisely. Demand-pull inflation can cause people to spend more money than they should, or even on things they do not need. Make sure you are only buying the things you need and not wasting money.
Finally, make sure to get involved in your local community. Demand-pull inflation can make it difficult to get ahead, but by getting engaged in your community and doing some good for others, you will feel better about yourself and the economy as a whole.
Demand-Pull Inflation Demand-pull inflation occurs when there is an increase in aggregate demand and an abundance of money in circulation. This causes prices to increase and the value of money to decrease.
Demand-pull inflation can also result from increased expectations of inflation, demand for commodities, and technological innovation. It causes the cost of living and unemployment rates to rise while it decreases spending power and productivity.
Demand-pull inflation is harmful to both consumers and the economy; however, there are ways to avoid it. Ways to avoid demand-pull inflation include controlling the money supply, keeping government spending under control, and promoting technological innovation.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.