The Pros And Cons Of Demand-Pullled Inflation

For the economy as a whole, demand pulled inflation refers to the price increases which results from an excess of demand over supply. It is a form of inflation and categorized by the four parts (households, businesses, governments and foreign buyers). When these parts want to purchase greater output than the economy can produce and we need more cash to buy the same amount of goods as before and the value of money falls, so they have to compete in order to purchase limited amounts of products and services.

Generally, the demand-pulled inflation result from any factor that increases aggregate demand.

Also, an increase in export and two factors controlled by the government are increases in the quantity of money and increases in government purchases

Also, it refers to the general price level increase because of increasing of consumer which is manifested in consumer price index (CPI).

CPI is used by the consuming public to recognize how their purchasing power is getting effected. It aims to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during earlier period. (Gwartney, James D.; Stroup, Richard L.; Sobel, Russell S. 1999)

Due to real factors, the demand-Pulled Inflation will occurred by issues such as: fall in tax rates, without change in government spending, increase in investments, increase in government spending without change in tax revenue, decrease in savings, increase in exports, and/ or decrease in imports.

For instance, buyers started generating more income or more volume of money, thus there will be high demand and the price of the goods or services will be increased.

Another example is, during pick season (vocation period), air-tickets cost higher because demand for trips or recreation is needed

It focuses on the excess in demand.

Cost pushed inflation is occurred when the raising in the price level of production costs (inputs), which could lead to reduction in the aggregate supply of outputs. It focuses on the decrease in supply.

2. Caused by:

Demand pulled inflation is caused by monetary and real factors (the increase in money supply government spending and foreign exchange rates).

Cost pushed inflation is caused by monopolistic groups of the society.

3. Output:

Demand pulled inflation: the output raise until employment is fully achieved.

Cost pushed inflation: the output fall down since the supply is reduced.

4. Description

Demand pulled inflation describes in what way or manner this type of inflation starts.

Cost pushed inflation describes about the difficulty reason to stop the cost pushed inflation.

5. Policy suggestion:

Demand pulled inflation: the suggestion is related with monetary and fiscal policies measure which amounts to the high level of unemployment.

Cost pushed inflation: the suggestion is related to monitor on price rise and income policy, whose objective is to control inflation without increasing