Demand pull inflation definition

Demand pull inflation is a condition in which the economy experiences increasing overall
demand for goods and services; this, in turn, causes the price of those goods and services to rise.
Demand pull inflation generally results from overall growth in the economy and is usually of
relatively short duration. Economic expansion and growth typically leads to higher employment
rates that increase the spending power of consumers and create increased demand for the goods
and services available within the economy. Essentially, a larger pool of consumers vying for the
same amount of goods and services will create scarcity that pulls prices upward until production
increases to match demand

Demand pull theory

In contrast to cost push inflation, which results from a scarcity of raw materials or an excess in
the money supply domestically or globally, demand pull inflation is generally considered to be a
result of growth and expansion in the economy and usually corrects itself within a short time.
Reduced unemployment not only increases the number of consumers, but also the overall
manufacturing capacity. For this reason, demand pull inflation typically is a self-correcting
phenomenon; manufacturers increase production to meet the increased demand, and prices return
to normal levels. Keynesian demand pull theory, however, argues that prices tend to stay
slightly above their previous levels due to altered consumer expectations; these sticky prices can
often create slight elevations in wages throughout the economy as well.

Demand pull inflation example

While demand pull inflation generally refers to overall price increases throughout the economy,
one of the best known examples of demand pull inflation is the increased demand and
skyrocketing prices of certain Christmas toys each year. In 1996, the popularity of Tyco’s Tickle
Me Elmo doll created extreme consumer demand for the toys, taxing manufacturing capacity to
its limits and allowing retailers to sell the dolls for much higher prices due to the increased
demand and limited supply. Some Tickle Me Elmo dolls sold for up to eighty times the list price
of $30, making it one of the most impressive examples of demand pull inflation in recent years.
Zhu Zhu pets are another, less dramatic example; these cute and cuddly animatronic hamsters
had a list price around $10, but sold for $80 to $90 during the height of demand for Christmas
2009.

Conclusions
Unlike cost push inflation, which usually indicates a serious underlying problem in the economy
and can linger for months or even years, demand pull inflation typically is of short duration and
is a side effect of economic expansion and low unemployment. For specific items, demand pull
inflation causes inflated prices for an extremely short duration until supply catches up with
demand. Overall, demand pull inflation represents a minor inconvenience in an otherwise robust
and growing economy and requires no special action by government or banking institutions since
it is self-correcting in a short amount of time.

CAUSES OF INFLATION:

Inflation comes to happen when the aggregate demand exceeds the aggregate supply. The major
factors causing inflation can be classified as under.

A- Demand side factors:

1- Increase in nominal money supply: Increase in nominal money supply without corresponding
increase in output increases the aggregate demand. The higher the money supply the higher will
be the inflation.

2- Increase in disposable income: When the disposable income of the people increases, their
demand for goods and services also increases.

3- Expansion of Credit: When there’s expansion in credit beyond the safe limits, it creates
increase in money supply, which causes the increased demand for goods and services in the
economy. This phenomenon is also known as ‘credit-induced inflation’.

4- Deficit Financing Policy: Deficit financing raises aggregate demand in relation to the
aggregate supply. This phenomenon is known as ‘deficit financing-induced inflation’.

5- Black money spending: People having black money spend money lavishly, which increases
the demand un-necessarily, while supply remains unchanged and prices go up.

6- Repayment of Public Debts: When government repays the internal debts it increases the
money supply which pushes the aggregate demand.

7- Expansion of the Private Sector: Private sector comes with huge capitals and creates
employment opportunities, resulting in increased income which furthers the increase in demand
for goods and services.

8- Increasing Public Expenditures: Non developmental expenditures of government lead to raise

aggregate demand which results as increased demand for factors of production and then
increased prices.

Remedies to control Inflation:

A- Monetary Measures

1- Credit Control: Central bank can adopt various methods to control the credit. It can raise the
bank rate. Demand pull inflation can be easily controlled by the central bank by following a
strong monetary policy.

2- Demonetization of the currency: Under this method the currency of higher denomination can
be withdrawn. This measure is effective to control the black money circulation.

3- Issue of new currency: The issue of new currency is the extreme measure of monetary policy.
Under this method new currency is issued to replace the old one and the value of deposits is
fixed accordingly. However, this measure is taken when there’s hyperinflation.

B- Fiscal Measures

1- Curtailment in unnecessary expenditures: Under this measure the government lessens its some
non developmental expenditure. It is, however, not an easy task for the government to reduce its
expenditures. Then it is therefore better to be supplemented by taxation measures.

2- Increase in rate of taxes: In order to maintain the flow of money government can impose
increased taxes over corporate and high income groups.

3- Increase in volume of savings: Savings also play an important role in the reduction of the
effects of inflation. Saving either it is voluntary or in voluntary plays a major role in this regard.

4- Anti inflationary budgetary policy: This measure suggests relying more on surplus budget and
avoiding deficit budget. This can happen only when government will reduce the unnecessary
expenditures.

5- Increasing public debt policy: Under this measure government should postpone the repayment
of public debts until the inflationary pressure lessens.

C- Non-Monetary and Non Fiscal Measures

1- Increase in volume of production: This measure can work as follows:

a- Production of consumer goods

b- Import of raw material rather than the finished goods
c- Rational labour policy
d- Rational industrial policy (long term)
e- Use of latest technology

2- Price control and rationing policy: Price controlling and rationing are two very important
measures to reduce the inflation. Under price control the prices of essential goods can be fixed
while rationing allows efficient distribution of commodities in all the areas at reliable prices.
REFERENCES

1- K.K.Dewett (Modern Economic Theory)

2- P.A.Samuelson (Economics)

3- Micheal PArkin (Economics)

Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply.
It involves inflation rising as real gross domestic product rises and unemployment falls, as the
economy moves along the Phillips curve. This is commonly described as “too much money
chasing too few goods”. since only money that is spent on goods and services can cause
inflation. This would not be expected to persist over time due to increases in supply, unless the
economy is already at a full employment level.

Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the
four sections of the macroeconomy: households, businesses, governments and foreign buyers.
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”,  causing inflation.

Demand-pull inflation explains why certain items or services rise in price even when they appear
to be in plentiful supply. A booming economy means that factories are hiring more workers and
those workers are producing more products. However, these additional employees are also
earning more money and want to spend that money on products they may not have able to afford
while unemployed or underemployed. Because the demand for these products rises but the
supply cannot be increased fast enough to meet it, the price of the products often rises. This price
rise during seemingly strong economic times is called demand-pull inflation by those who
ascribe to the Keynesian economics model.

Factors Pulling Prices Up

The increase in aggregate demand that causes demand-pull inflation can be the result of various
economic dynamics. For example, an increase in government purchases can increase aggregate
demand, thus pulling up prices. Another factor can be the depreciation of local exchange rates,
which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the
purchasing of imports decreases while the buying of exports by foreigners increases, thereby
raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up
with aggregate demand as a result of full employment in the economy). Rapid overseas growth
can also ignite an increase in demand as more exports are consumed by foreigners.   Finally, if
government reduces taxes, households are left with more disposable income in their pockets.
This in turn leads to increased consumer spending, thus increasing aggregate demand and
eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing
consumer confidence in the local economy, which further increases aggregate demand.