The combination of cost-push inflation and demand-pull inflation is known as stagnation. In this scenario, the general price level starts increasing owing to some discrepancy in the supply and demand of commodities. This results in the escalation of factor costs, leading to inflation.
Demand-Pull Inflation vs Cost-Push Inflation: Key Differences
What Is Demand-Pull Inflation?
Demand-pull inflation occurs when there is an escalation in demand for any particular good or service. Generally, when the increase in demand can be seen for available products in the market, their values tend to rise. Even though a short-term discrepancy in supply and demand may not induce too much effect, sustained heavy demand impacts the nation's economy by increasing the prices of items.
In this type of inflation, the demand towards commodities becomes more than their total supply. As a result, manufacturers have no option but to upsurge the selling prices of their goods.
What Is Cost Push Inflation?
Cost-push inflation occurs when the price of certain goods and services increases due to an increase in the prices of factors of production such as raw materials, increase in production costs, higher wages, and so on. Here, the demand remains constant, but the supply of such goods falls owing to higher production costs.
Under such circumstances, manufacturers increase the prices of their products to balance the upsurge in production costs. Consequently, this increase in price puts a burden on buyers by making them pay overpriced amounts for finished products.
Differences Between Demand-Pull Inflation and Cost-Push Inflation?
The key differences between cost-push and demand-pull inflation are discussed below in the following table:
Cost-push inflation occurs in case there is an upsurge in the price of inputs. Consequently, manufacturers produce fewer items, decreasing the supply of items or outputs.
Demand-pull inflation is caused when the aggregate demand increases quicker than the aggregate supply in an economy.
An increase in the price of input costs causes cost-push inflation. The monopolistic groups in society, like labour unions and firms, also play a significant role.
When it comes to demand-pull inflation, it is caused by monetary and real factors.
To cope up with cost-push inflation, the government organises deflationary monetary policy or supply side policies.
To deal with this scenario, governments, alongside public banks, should work together to adopt strict fiscal policies. These policies may include lessening government spending, increasing taxes, etc.
Cost-push inflation is typically driven by producers.
Demand-pull inflation is primarily driven by consumers.
Association with GDP
Cost-push inflation is associated with a negative GDP gap since the increasing production costs diminish spending and output.
Demand-pull inflation occurs with a positive GDP gap since actual GDP exceeds its potential only if aggregate spending is progressive.
The cost-push inflation is not too prevalent in recent times.
The demand-pull inflation takes place in most economies worldwide.
What Are the Effects of Demand-pull Inflation?
Mentioned below are some of the common negative effects which occur during demand-pull inflation:
- Diminishes purchasing power of customers
- Increases cost of borrowing
- Causes potential impact on currency rates
- Increases spending to avoid the impact of further inflation
- Continued growth of inflation
What Are the Effects of Cost-push Inflation?
Following are the common effects seen during cost-push inflation in an economy:
- Reduction in aggregate supply
- Lessening purchasing power of consumers
- Reducing profit margins
- Increasing unemployment
- Reduction in economic growth
From the above discussions, you can understand the difference between demand-pull inflation and cost-push inflation alongside their effects on a country's economy. Although there is a dispute regarding which of these two factors increases the general price level in an economy, according to experts, demand-pull is the principal factor for inflation.
FAQs About Demand-Pull Inflation vs Cost-Push Inflation
The most popular investment instruments to shield against inflation include gold, index funds, real estate, etc. In addition, you can even invest your money in precious metals such as silver, platinum, and palladium, as well as in agricultural commodities such as wheat, soybeans, etc.
Mentioned below are the three major factors that are responsible for causing cost-push inflation in an economy:
- Wage-Push Inflation
- Material-Cost-Push Inflation
- Profit-Push Inflation
Just like cost-push inflation, three crucial factors are responsible for causing demand-pull inflation in an economy. They are:
- Expanding Economy
- Increased Government Spending
- Overseas Growth
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