Demand-pull inflation is one of the two types of general inflation. It comes because of powerful consumer demand in an economy. When many different people choose to buy the identical product, this will result in a price increase. If this scenario transpires in an entire economy on all kinds of goods, then it becomes the demand-pull type of inflation.
Keynesian economists utilize demand-pull inflation to explain the events when prices begin to go up from an imbalance of the relevant demand and the total available supply. When all around demand within the economy greatly overtakes the full supply, prices rise. Economists have colorfully called this type of inflation the unavoidable and unfortunate result of too many dollars chasing after an insufficient quantity of goods.
This Keynesian theory describes what happens when there is an increase in employment. It subsequently results in a growth in total demand. Because demand is rising, companies engage additional employees to help them boost their total output. The more individuals businesses employ, the higher employment goes. Finally, business output is insufficient to keep up with their demand so the total cost of the good will increase to match demand.
Demand-pull inflation should not be confused with the other kind of inflation referred to as cost-push inflation. In the cost-push variety, wages and prices go up together and transfer from one economic sector to another. The two types of inflation move in basically the same way yet work because of different causes.
Demand-pull inflation demonstrates the way that rises in price begin. Cost-push explains how it is hard to stop inflation after it has started. The main concept behind demand-pull inflation centers on powerful consumer demand which exceeds total supply to substantially drive higher inflation. All markets are limited to a specific quantity of goods. When the demand for the finite goods becomes enormous, the costs of the goods must rise to be higher.
Ultimately, demand-pull inflation results from five different causes. When spending increases from consumers, then businesses become confident enough to put on additional staff to keep up with demand. A second is when exports suddenly rise and this causes the relevant currencies to become undervalued. A third happens when government spending rises.
Another is the expectation and prediction of inflation causes companies to raise their prices to keep pace with it. Finally, too rapid growth in the monetary supply can cause such demand-pull variety of inflation. When there is an overabundance of money within the economy then there will not be enough goods to go around without prices rising to compensate and reduce the demand.
Oil refineries provide a solid example of demand-pull inflation. If they operate at full capacity, these refineries create this type of inflation. Regulatory issues from environmental concerns make it difficult for refineries to operate at full capacity. This limits the available supply of oil products. It is not that there is an insufficient amount of oil or companies producing it. Instead the problem results from artificially imposed legislation that keeps the market from receiving the ideal supply of finished goods that are in high demand. This causes the oil industry to be among the largest contributors to supply-demand inflation.