Learning Objectives

Demand-Pull Inflation

Demand-Pull inflation occurs when there is a rise in aggregate (total) demand, however, little or no change in aggregate supply. Put simply, demand-pull inflation is caused by increased demand for a certain good that is so great, producers cannot increase supply quickly enough to meet demand.

Demand-Pull inflation may be caused by a growing economy where consumers feel confident to spend money, increased exports, increased government spending, expectations of future prices or an expansion of money supply.

An example of this type of inflation could include the new demand for Teslas. The new demand for electric cars following the surge in oil prices can be an example of demand-pull inflation as their popularity increased so suddenly, production wasn't anticipating the level of demand.

Cost-Push Inflation

When the price level for goods and services increases due to a rising cost of wages and raw materials without a change in the level of demand, this is known as cost-push inflation. These higher costs of production are then passed onto consumers through increased prices for goods and services, causing an appreciable rise in the general price level for products within the economy.

The example used by investopedia.com used to describe cost-push inflation was the Organisation of the Petroleum Exporting Countries in the 1970s. This is a cartel that consists of 13 countries that both produce and export oil. Due to political events, OPEC imposed an oil ban on the United States which caused the prices of oil to quadruple from $3 a barrel to $12. This is an example of cost-push inflation as there was no change in the level of demand for oil, yet the cost of oil caused an appreciable rise in all products that needed oil for their production processes.