Cost‑Push vs Demand‑Pull Inflation
What It Is
Cost‑push and demand‑pull inflation are the two primary drivers of rising prices in an economy.
Why It Matters
Understanding the source of inflation helps policymakers choose the correct tools to address it.
How It Works
Demand‑Pull Inflation
- Driven by strong consumer demand
- Occurs when spending outpaces supply
- Common during economic booms
Cost‑Push Inflation
- Driven by rising production costs
- Caused by supply shocks, wages, or commodities
- Common during supply disruptions
Key Components
- Aggregate demand
- Production costs
- Supply chain dynamics
- Wage pressures
Example
Oil price spikes create cost‑push inflation, while stimulus‑driven spending surges create demand‑pull inflation.
Key Takeaways
- Inflation can come from demand or supply.
- Policy responses differ depending on the cause.
- Misdiagnosing inflation leads to policy mistakes.