FOR SOLVED PREVIOUS PAPERS OF INDIAN ECONOMIC SERVICE KINDLY CONTACT US ON OUR WHATSAPP NUMBER 9009368238
FOR SOLVED PREVIOUS PAPERS OF ISS KINDLY CONTACT US ON OUR WHATSAPP NUMBER 9009368238
FOR BOOK CATALOGUE
CLICK ON WHATSAPP CATALOGUE LINK https://wa.me/c/919009368238
Demand-Pull vs. Cost-Push Inflation
1. Introduction
📌 Inflation refers to a general rise in price levels over time. Two major types of inflation are:
✔ Demand-Pull Inflation: Caused by excessive demand for goods and services.
✔ Cost-Push Inflation: Caused by rising production costs.
🚀 Why is it important?
✔ Helps policymakers design effective anti-inflation policies.
✔ Identifies whether inflation is due to high demand (good for growth) or supply shocks (bad for growth).
2. Demand-Pull Inflation
🔹 Definition:
📌 Demand-pull inflation occurs when aggregate demand (AD) rises faster than aggregate supply (AS), leading to higher prices.
🔹 Causes:
✔ 1. Expansionary Fiscal Policy – Government spending increases (e.g., stimulus checks, infrastructure projects).
✔ 2. Expansionary Monetary Policy – Low interest rates encourage borrowing and spending.
✔ 3. Higher Consumer Confidence – People spend more if they expect future income growth.
✔ 4. Wage Increases – Higher wages increase consumer spending and demand.
✔ 5. Strong Export Demand – A trade surplus increases domestic demand.
🔹 Graphical Representation:
- In the AD-AS model, an increase in AD shifts the AD curve to the right, increasing GDP and price levels.
🔹 Examples:
✔ Post-WWII U.S. Economic Boom – High demand led to inflation as production struggled to keep up.
✔ COVID-19 Stimulus Packages (2020–2021) – Excess liquidity increased demand, leading to inflation.
3. Cost-Push Inflation
🔹 Definition:
📌 Cost-push inflation occurs when rising production costs (wages, raw materials) force businesses to increase prices.
🔹 Causes:
✔ 1. Rising Wages – Higher labor costs passed onto consumers.
✔ 2. Supply Chain Disruptions – Shortages (e.g., semiconductor chips) reduce supply.
✔ 3. Raw Material Price Increases – Higher oil, gas, or commodity prices raise costs.
✔ 4. Currency Depreciation – Increases the cost of imported goods.
✔ 5. Natural Disasters or Geopolitical Shocks – Wars, pandemics, or disasters limit supply.
🔹 Graphical Representation:
- In the AD-AS model, an increase in costs shifts the AS curve to the left, reducing GDP and increasing price levels.
🔹 Examples:
✔ 1970s Oil Crisis – Oil price shocks caused massive cost-push inflation.
✔ 2021 Global Supply Chain Crisis – Shortages of goods raised production costs.
4. Key Differences Between Demand-Pull and Cost-Push Inflation
| Feature | Demand-Pull Inflation | Cost-Push Inflation |
|---|---|---|
| Cause | Excess demand | Rising production costs |
| Effect on GDP | Increases GDP (short-run) | Reduces GDP |
| AS-AD Model Shift | AD curve shifts right | AS curve shifts left |
| Examples | Post-WWII boom, stimulus spending | Oil crisis, supply shortages |
| Policy Response | Increase interest rates, reduce spending | Control supply shocks, subsidies |
5. Policy Measures to Control Inflation
🔹 1. Controlling Demand-Pull Inflation
✔ Increase interest rates (tight monetary policy).
✔ Reduce government spending (tight fiscal policy).
✔ Increase taxes to limit disposable income.
🔹 2. Controlling Cost-Push Inflation
✔ Increase supply-side efficiency (improve production capacity).
✔ Control wage growth (limit excessive wage hikes).
✔ Subsidize essential goods (to reduce production costs).
6. Conclusion
✔ Demand-pull inflation is caused by high demand, while cost-push inflation is due to rising costs.
✔ Demand-pull inflation can be controlled by tight fiscal and monetary policies.
✔ Cost-push inflation requires supply-side measures to lower production costs.
✔ Policymakers must identify the correct inflation type before implementing solutions.