Types of Inflation: Demand Pull, Cost Push, Stagflation, Structural Inflation, Deflation and DisinflationAdmin
Even lawyers and teachers are demanding higher pay as inflation soars and is expected to reach 13 per cent later this year. One important reason for demand-pull inflation is increase in money supply in excess of increase in potential output. Whether increase in money supply in excess of increase in output is the only cause of inflation is a controversial issue. But the fact is that monetary expansion in excess of increase in the level of output is one of the most important factors causing demand-pull inflation.
- In such scenarios, an unwarranted wage increase leads to increase in the cost of production and hence cost push inflation.The firms sometimes decide to increase their profit margins and starts charging higher prices for their product.
- Inflation favours the borrower if incomes rise with inflation, even if the borrower still owes money before inflation happens.
- An unexpected rise in exports pushes all of this to go on a faster pace, and the value of currency gets reduced in the foreign exchange.
- When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation.
A rise in an inflation rate can cause more than a fall in purchase power. Investors investing in assets affected by inflation, if held on for a long time will certainly benefit from it. For example, an increase in housing prices might affect consumers. However, those who have already bought a house will benefit from capital appreciation. Due to lower demand in these developed economies, they are not witnessing growth.
combine phenomena of demand pull and cost push inflation.
But if kept unchecked, the prices keep on rising and may cross the ‘safe-level’. Thus, it is important to spot demand-pull inflation when it happens and keep a check on it. In an economy, higher expenditure by consumers fuels economic growth. So, for economic growth, it is essential that consumer demand be forced to go up, which ultimately would force consumption to go up as well.
This phenomenon pushes the price upward and results in Profit Push Inflation.The raw material push inflation also known as supply shock inflation is the main and the most important reason for cost push inflation. What is called “anti-inflationary policy” under capitalism is simply a way of ensuring that the share of wages goes down appropriately. It is supposed to reduce excess demand by discouraging borrowing from banks; but its effects are scarcely confined to reducing demand alone and not reducing capacity utilisation and employment. The decrease in die interest rate increase in transaction demand for money , especially for investment. Increase in investment causes increase in the level of income.
(exports cheaper, imports more expensive). Devaluation will also cause cost-push
But precisely because of its rampant use, by now the share of the primary commodity producers in the global gross value of output has shrunk to such a low level , that any further shrinking of it will not be particularly effective in controlling inflation. Under mature capitalism therefore inflation control cannot be achieved except at dtc stand for the expense of the working class . When the economy of a country is increasing and there are increasing job opportunities, the customers tend to spend more money because they are secure of their jobs and confident about their future economic conditions. An increase in the mandatory wage of the labour also leads to cost-push inflation.
Organized and powerful labour unions exercise their monopoly power and force their employers to increase their money wages above the competitive level without matching increase in labour productivity. Increase in money wages causes an equal increase in the cost of production. The increase in cost of production causes the aggregate supply curve shift backward.
How big a threat is inflation?
When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers, in essence, “bid prices up” again, causing inflation.This excessive demand, also referred to as “too much money chasing too few goods,” usually occurs in an expanding economy. Inflation discourages saving unless there is an attentive central bank on hand to drive up interest rates because the buying power of deposits erodes over time. The prospect provides an opportunity for customers and companies to spend or invest.
This is because the creditor still owes the same sum of money, but now they are paying off the debt with more money in their paycheck. If the creditor uses the extra money to pay off their loan early, this results in less interest for the lender. Inflation is the rise in price levels of the commodities we use due to rising in price levels in the economy and not because of improvements in the quality or quantity of the commodities. Inflation occurs when prices of goods and services are rising while the purchasing power of the country is decreasing.
- The profit-push type of inflation is more common where labour unions demand higher wages.
- Demand-pull inflation occurs when in an economy, the demand for goods and services increase, typically triggered by overall economic growth, technological innovations, or a rising inflation rate.
- WPI captures goods or services sold by a business to smaller businesses for selling further.
- In 1970, due to some geopolitical events, OPEC imposed an oil embargo on the United States and other countries, while also imposing oil production cuts.
- Thus, it is important to spot demand-pull inflation when it happens and keep a check on it.
- Customer expectations are another cause of demand-pull inflation, that is, when inflation starts occurring frequently, customers start expecting it and therefore, plan accordingly.
Three things which affect inflation are demand, supply and expectations of goods. When prices of goods and services rise a little bit, people start buying even more as they believe that the prices are going to rise further. When demand exceeds supply, there is excess demand, and prices rise.
Demand Pull Inflation Quiz / MCQs / FAQs
The government then collected all the silver coins and melted them, and also mixed other metals such as copper or lead to produce more coins at the same nominal value . By diluting the silver, the government produced more coins without increasing any amount of silver. This approach allowed the government to make profits because now the cost to make each coin is lowered while the value remains the same. This practice increases the money supply while simultaneously reducing the value of each coin, which results in consumers being required to give more coins in exchange for the same goods and services as before. In the present scenario, we can replace older coins with the new currency in order to get an idea of why the government cannot merely print more money to solve the problem of inflation.
- But then, what is inflation and how does it impact the lives of people?
- Higher costs of production can decrease the aggregate supply in the economy.
- Buyers, in essence, “bid prices up” again, causing inflation.This excessive demand, also referred to as “too much money chasing too few goods,” usually occurs in an expanding economy.
Change in government regulation or current laws that in some way affect the businesses may also lead to cost-push inflation. There is some evidence that unemployment can be driven down by inflation. https://1investing.in/ Wages tend to be sticky, which means that in reaction to economic changes, they adjust slowly. Others, mainly in the U.S. where inflation is running at a 13-year high, are skeptical.
Demand Pull Inflation – Types of Inflation
Another important factor that causes an increase in demand-pull inflation is the lowering of taxes by the government. Some economists believe Inflation is necessary for economic growth. However, beyond a specific limit, Inflation hurts both consumer and economic growth.
The Ukraine war is not just a conflict between two neighbouring countries; it is the outcome of the desperation of imperialism in the face of its crumbling dominance. Imperialism in short is attempting to shore up its dominance by squeezing the working class in the metropolis; but this will only push the metropolis into greater difficulties. There is deflation in an economy when Supply is greater than Demand. Because of lack of demand, companies will not produce goods, which will cause fall in wages & ultimately reduction in aggregate demand .This again causes shrinking of economy.
Furthermore, even when there is stagnation in the economy and there is no inflationary pressure, the general price level generally continues to increase, with a high rate of unemployment. The search for explanation to this kind of phenomenon, particularly for the 1958-puzzle, has lead to the emergence of supply-side theories of inflation, popularly known as cost-push theory and supply-shock theory of inflation. Wage Push Inflation generally happens during high growth periods. During which workers anticipate a hike in their wages due to rising cost of living. Wage Push InflationProfit Push InflationRaw Material Push InflationWhen the employees push for an increase in wages which are not justifiable either on the grounds of employee productivity or increase in the cost of living. In such scenarios, an unwarranted wage increase leads to increase in the cost of production and hence cost push inflation.The firms sometimes decide to increase their profit margins and starts charging higher prices for their product.