Demand-Pull Inflation

When the prices of goods and services increase at a steady rate over a period of time, it is referred to as inflation. Generally, there are three kinds of inflation that occur in an economy. The demand-pull inflation is one of the common types which occurs when the aggregate demand for a particular good is higher than the aggregate supply. This takes place when consumers demand any particular good or service. 

In order to meet the supply, producers increase production. However, when resources are lacking, they choose to increase the prices of the product, which results in demand-pull inflation. Demand-pull inflation is a common kind of inflation that mostly takes place when the supply level falls or supply cost increases. Today, we will explore the concept of demand-pull inflation and other related topics in detail. So, without any further ado, let’s get started!

Explain the concept of Demand-Pull Inflation 

When the aggregate demand in the economy increases, the resources to produce the goods fall short. This condition leads to demand-pull inflation. There are several causes leading to this type of inflation. These include the following: 

Increase in the money supply in the economy 

The rise in the Forex reserves 

Due to fiscal stimulus

Government spending

Depreciation of rupee

Increased borrowing

Low unemployment rate

Causes of Demand-Pull Inflation 

There are 5 causes of demand-pull inflation.

A growing economy 

A growing economy is one of the major reasons for demand-pull inflation. We tend to spend more when we feel confident. We start to invest money, which ultimately increases the value. However, slowly and steadily, it starts to bring about the condition of demand-pull inflation. 

Increase in money supply 

When there is too much money circulation in the economy, it is not an ideal condition. This generally occurs when the government is under high debt, and they decide to print new notes to pay off the debt. If not taken care of, this condition can lead to hyperinflation. 

Strong branding 

Great marketing techniques increase the demand for a particular product, leading to inflation. A common example of it is Apple products, whose prices are higher compared to its competitors. 

Technological innovations 

A company involved in creating end-to-end products using cutting-edge technologies is always on the top. Today, we live in a technology-enabled environment where people look for highly-advanced products and the latest gadgets. As a result, it increases sales and ultimately leads to demand-pull inflation.  

Expectation of inflation 

At times, people expect the condition of inflation in an economy. In such conditions, they tend to buy goods to avoid future high prices. This elevates the demand for a particular product, leading to demand-pull inflation. 

Effects of Demand-Pull Inflation on the Economy 

The following are the effects of demand-pull inflation in the economy:

The rise in prices of goods and services is also referred to as inflation

Shortage in supply

Unemployment falls

Rise in the cost of living

Effects on Production 

The rise in prices of goods or services stimulates its production. As producers are happy to get high profits, they utilise all resources to produce more. However, after reaching the stage of total employment, production stops at a certain point as all resources are fully used. 

This gives rise to the cornering and hoarding of commodities, although these effects are not always seen. Whereas, even after increasing prices, production comes to a still position. This condition is referred to as stagflation. 

Effects on Employment and Income 

Another significant impact of inflation is seen on income and employment. As production and spending increase, the national income also increases. 

Also, it gives rise to employment opportunities, as there is a higher need for workers. However, the income of the people falls because of the massive fall in the purchasing power of the money. 

Effects on Growth 

On the one hand, where mild inflation contributes to economic growth, hyperinflation can negatively affect the development of an economy. In developing countries like India, benign inflation is the ideal condition. 

Difference between Demand-Pull Inflation and Cost Push Inflation 

Conclusion 

With this, we come to the end of the topic Learn about Demand-Pull Inflation. Inflation can be defined as the process of a steady rise in the prices of goods or services over a period of time. 

Demand-pull inflation is a common condition that occurs when the aggregate demand in the economy increases, whereas the resources to produce the goods fall short. Demand-pull inflation is a common kind of inflation that mostly takes place when the supply level falls or supply cost increases.