Inflation is defined as the general increase in the prices which results in the fall of the purchasing value of money. The developing country faces some severe economic challenges and inflation is one of the harshest out of them. There can be several factors or reasons behind the inflation in the country, though the experts in the country evaluate these factors and try to diminish them as soon as possible. Primarily there are two major causes of the inflation, one is the demand for commodities and products, and the other is the supply of the commodities and products. In some of the situations both the demand and supply together can be the cause of the inflation. The inflation which is caused due to the demand side factors is known as the demand-pull inflation. On the other hand, the inflation which is caused by the supply side factors is known as the cost-push inflation.
What is Demand-Pull Inflation?
The demand-pull inflation is one of the major types of inflation that is caused due to the demand side factors within the country or the particular area. In this type of inflation, the aggregate demand surpasses the aggregate supply. In this type of situation, the purchaser, which can be categorized mainly into four sections: governments, businesses, households and foreign buyers strive to buy the limited commodities and services available. The purchaser or consumers demand surpasses the supply in this type of scenario, and it is unable for the economy to produce the required products or commodities by the consumers. In other words, we can explain this situation as “too much money chasing too few goods.” The developing or the expanding countries witness face these type of economic hurdles. The real issues behind the demand-pull inflation are the monetarily and real factors. Demand-Pull inflation is eliminated by taking a close look at the monetary and fiscal policies are recommended by the experts. When the economy witnesses increase in the money supply as compared to the level of output, then this type of the inflation demand-pull inflation is caused due to the monetary factors. Conversely, if the increase in investments causes the demand-pull inflation, fall in tax rates, a decrease in savings and other such factors is known as the demand-pull inflation due to the real factors.
What is Cost-Push Inflation?
The cost-push inflation is the type of inflation which is caused due to the supply side factors within the country or the specific area. In this type of inflation, the decrease in the supply of outputs directly harm the needs and demands of the consumers. As the supply falls or gets reduced it directly results in the rise of the prices of the goods. The increase in the general price level or the decrease in the supply takes place various factors. Most prominently, the cost-push inflation occurs due to the scarce of the inputs and the rise in the prices of the factors of production. The push in the term ‘cost-push inflation’ actually denotes the increases in the cost of production, which directly affects in the decrease in the aggregate supply of products and services. The increase in cost is due to the increase in the factors of production, i.e., labor, capital, entrepreneurship and the land. There can be one or more than one factors of production involve in making the increase in the prices of the goods and services. The main cause of the cost-push inflation is the monopoly set by the groups within the market. The cost-push inflation can be eliminated after the income policy and the policy on administrative control on price are reviewed and altered according to requirement.
Demand-Pull Inflation vs. Cost-Push Inflation
- Demand-pull inflation is the type of inflation in which aggregate demand of the consumer surpasses the aggregate supply. Contrary to this, Cost-push inflation is the type of inflation in which the supply of the goods and services gets decreased, and the price gets increased due to the rise in the prices of the factors of production.
- The demand-pull inflation tries to explain the phenomena that how does the inflation starts, whereas the cost-push inflation deals with the idea of the difficulties faced while eliminating the inflation when it once starts.
- The demand-pull inflation is caused due to the increase in the money supply, which can be due to several factors including the increase in investments, a decrease in savings and others. Conversely, the cost-push inflation is caused due to the emergence of the monopolistic groups in the market.
- To eliminate demand-pull inflation revisions in fiscal and monetary policies are to be made, whereas the income policy and the policy on administrative control on price should be reviewed and modified according to the need of the hour.