Demand pull inflation and cost-push inflation, Microeconomics

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Demand Pull Inflation and Cost-Push Inflation:

Demand Pull Inflation:It describes a sustained increase in the general price level that is caused by a permanent increase in nominal aggregate demand. Simply, it can be viewed as an inflation that occurs as a result of increase in aggregate demand.

Cost Push or Supply Inflation: It is a situation where the process of increasing price level is caused by increasing costs of production which push up prices. Cost push inflation is also referred to as supply inflation. Price level in this case increases due to an increase in business costs. These increases in prices occur in the face of high unemployment and slacken resource utilization. The increase in cost of production causes supply of final goods and services to fall.This creates excess aggregate demand and a new equilibrium is attained at a higher level.

Two points to note about Demand Pull and Cost Push Inflation.

(i) It must be used noted that in both processes, inflation is caused by excess demand. It is the cause of this excess demand that distinguishes one from the other.

(ii) Demand pull inflation may cause an increase in output up to the potential output level whilst cost push inflation causes supply (output) to fall and the economy declines further away from potential output.

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