Distinguish demand pull, cost push and imported inflation using graphs where appropriate. What are the likely causes of current inflation in Australia?
Answer
Cost push inflation
1) It occurs when there is increase in costs independent of any increase in aggregate demand.
2) Main reason for cost push inflation are-
a) an increase in wage rate
b) An increase in price of raw materials
Demand Pull Inflation
1) This represents a situation when the basic factor at work is the increase in demand for output and the pressure of demand is such that it cannot be met by the currently available supply of output.
2) Causes of demand pull inflation are-
a) Increase in money supply.
b) Increase in government purchases
c) Increased demand by firms and households.
Imported Inflation
According to the Oxford dictionary of economics, imported inflation occurs due to increase in the prices of imports. Increases in the prices of imported final products directly affect any expenditure-based measure of inflation. Increases in the prices of imported fuels, materials, and components increase domestic costs of production, and lead to increases in the prices of domestically produced goods. Imported inflation may be set off by foreign price increases, or by depreciation of a country's exchange rate.
Likely causes of inflation in Australia are-
1) Increased spending expenditures.
Increasing cost of food and fuel