Demand Pull Inflation vs Cost Push Inflation

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.

The difference between these two types of inflation is found in their causes.  Both have the same effects (increasing price level), but they are caused by different things.

Demand-pull inflation is caused by excess demand.  When the people as a whole get more money they are able to pay more for goods and services (unless more goods and services are produced).  Economists talk about more money "chasing" the same amount of goods and services.  This causes shortages and prices rise.

Cost-push inflation is caused by disruptions in supply.  These disruptions cause increases in the price of production.  That leads to inflation.  For example, a rise in the price of oil causes practically all production to become more expensive.