Why is it likely possible that demand-push and cost-pull inflation would occur in an economy?

1 Answer
Oct 29, 2015

Refer Explanation Section.


Demand Pull Inflation:

Inflation originating from the demand forces is commonly referred to as Demand Pull Inflation. It occurs when the demand for goods and services exceeds the supply available at the existing prices. Excess demand pulls up the price level and results in the emergence of inflation.

Increase in aggregate demand may originate either from real factors or monetary factors.

Increase in government expenditure, a decrease in taxes, increase in consumption expenditure, increase in export demand and increase in private investment expenditure are some of the real factors.

Increase in money supply is on the monetary side. There is disagreement among the economist over the relative importance of monetary and real factors causing inflation.

Economists like Milton Friedman believe in the monetary factors. J R Hicks and his followers feel real factors are crucial in causing inflation.

Cost Push Inflation

Cost push inflation refers to rise in prices which arises due to increase in costs. This is also known as supply side inflation.
It is caused mainly by increase in wages cost and increase in the profit margin.

The primary cause is the rise in money wages in excess of rise in productivity of labour. Strong trade unions are able to press employers to grant higher wage. As the cost goes up, the producers include this in the price. A series of increase in wage rate leads to a series of increase in price. This is Wage-Push variant of cost-push inflation.

Another variant of cost-push inflation is Profit-Push Inflation.  Oligopolist and monopolist firms raise the price of their products so as to earn higher profits.  A series of increase in the profit margins will lead to increase in cost of production and thereby prices, resulting in inflationary rise in prices.

Demand Pull Inflation
Cost Push Inflation