Unravel the complexities of economic inflation as we delve into the contrasting dynamics of Cost-Push and Demand-Pull Inflation. Understand their unique characteristics, causes, and impacts, and explore how they shape the economic landscape differently.
Cost-Push Inflation vs. Demand-Pull Inflation: An Overview
There are four main drivers behind inflation: cost-push inflation, which is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
- Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.
Special Considerations
Supply-side policies need to be enacted with the goal of increasing aggregate supply
- To increase aggregate supply, taxes can be decreased and central banks can implement contractionary monetary policies, achieved by increasing interest rates
- Countering demand-pull inflation would be achieved by the government and central bank implementing contractionary fiscal and monetary policies
Cost-Push Inflation
When the aggregate supply of goods and services decreases because of an increase in production costs
- Prices have been “pushed up” by increases in the costs of any of the four factors of production-labor, capital, land, or entrepreneurship-when companies are already running at full production capacity
- In order to compensate, the increase in costs is passed on to consumers, causing a rise in the general price level: inflation
Demand-Pull Inflation
This occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments, and foreign buyers
- When concurrent demand for output exceeds what the economy can produce, the four sectors compete to purchase a limited amount of goods and services
- Just like cost-push inflation, demand-pull inflation can occur as companies pass on the higher cost of production to consumers to maintain their profit levels
