The Difference Between Demand Pull Inflation And Cost Push Inflation

February 8th, 2009 Comments off
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There are two types of inflation namely the Demand Pull Inflation and Cost Push Inflation. Below tabulate the features:

Demand Pull Inflation

  • A situation where the demand for goods and services rises faster than the supply of goods and services. This excess demand increases the prices of the goods and services hence creating inflation.
  • Can be simply said as “ Too much money chasing too few goods ”.
  • Basic cause comes from the demand side
  • Some factors that cause this demand pull inflations are excessive foreign investment, expansionary fiscal policy e.g increase in government expenditure), expansionary monetary policy( eg. Increase in money supply),easy access to credit , deficit financing and others
  • Due the increase in aggregate demand which cannot be met by corresponding increase in aggregate supply because there is no more unemployed resources to be drawn into production.

 

Cost Push Inflation

·        Cost push inflation simply arises from increased cost of production.

·        The increased cost of production can be due to aggressive trade unions seeking for higher wages/ allowances, etc , increases in the prices of local raw materials or imported raw materials or products or services.

·         Due to increased cost of production, manufacturers have to increase their prices of their goods/products to compensate the increased costs in raw materials or labor hence creating inflation.

·         For example, in Malaysia, due to the oil crisis in 1973-1974 and 1979-1980, cost of production increased sharply and which increased the price level and cause cost push inflation.

Salient point:

  • Though inflation cannot be distinctly related to the demand pull and cost push inflation, it is important to understand them so that corrective actions can be done to mitigate inflation.
  • For example, where there is a greater element of demand pull, then the government needs to ensure ready supply of goods and services for example, asking producers/retailers not to halt or hoard goods respectively.

[ Click here for Content page for all articles on Inflation ]

 

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