Introduction
Cost push inflation demand pull inflation are the two widely discussed types of inflation studied in economics. Understanding cost push inflation demand pull inflation helps students and readers explain why prices increase in an economy.
Inflation occurs when the general price level rises over time. Economists classify inflation into main categories such as demand‑pull and cost‑push inflation. These two types of inflation explain whether rising prices are caused by increasing production costs or increasing demand. The basic concepts of inflation are explained in detail in our article What is Inflation – Definitions, Types, Causes (EconTips).
Economics students at A/L and university level often study cost push inflation demand pull inflation to understand economic fluctuations and government policies.
This guide explains cost push inflation demand pull inflation in simple language with diagrams, examples, and exam‑focused explanations.
Definition
Cost push inflation demand pull inflation are the two main causes of inflation. Demand pull inflation occurs when aggregate demand increases faster than aggregate supply, causing prices to rise. Cost push inflation occurs when production costs increase, forcing firms to raise prices even if aggregate demand does not increase proportionally. In macroeconomics, inflation refers to a sustained rise in the general price level of an economy. (Econ Tips)
What is Inflation?
Inflation is a continuous increase in the general price level of goods and services.
When inflation occurs:
- Prices increase
- Purchasing power falls
- Money buys fewer goods
Understanding cost push inflation demand pull inflation helps explain why inflation occurs.
If you want an overview of the causes and types of inflation including demand‑pull and cost‑push, our inflation article covers it under cause‑based inflation. (Econ Tips)
Demand-Pull Inflation
Definition of Demand Pull Inflation
Demand pull inflation occurs when total demand in an economy increases faster than production.
Simple Definition
Demand pull inflation occurs when too much money chases too few goods.
Demand pull inflation is caused by strong economic growth.
Causes of Demand Pull Inflation
1. Increase in Consumer Spending
When consumers spend more money:
- Demand increases
- Prices rise
This creates demand pull inflation.
2. Government Spending
Government projects increase demand.
Examples include:
- Infrastructure projects
- Public sector wages
This contributes to demand pull inflation.
3. Increase in Investment
Business investment increases economic activity.
Higher investment leads to demand pull inflation.
4. Increase in Exports
When exports increase:
- Foreign demand rises
- Prices increase
This creates demand pull inflation.
Diagram Explanation – Demand Pull Inflation
Economists often show demand‑pull inflation with an Aggregate Demand–Aggregate Supply (AD‑AS) diagram where an outward shift in AD leads to higher price levels. (Wikipedia)
Examples of Demand Pull Inflation
Economic Booms
During economic growth:
- Employment increases
- Income increases
- Demand increases
This causes demand pull inflation.
Post‑Recovery Periods
After recessions:
Demand increases rapidly.
This creates demand pull inflation.
Cost Push Inflation
Definition of Cost Push Inflation
Cost push inflation occurs when production costs increase.
Firms increase prices to maintain profits.
Simple Definition
Cost push inflation occurs when higher costs cause higher prices.
Causes of Cost Push Inflation
1. Wage Increases
Higher wages increase production costs.
Firms increase prices.
This creates cost push inflation.
2. Increase in Raw Material Prices
Higher oil prices increase costs.
This causes cost push inflation.
3. Supply Shortages
Natural disasters reduce supply.
Prices increase.
This creates cost push inflation.
4. Taxes on Businesses
Higher taxes increase costs.
Firms raise prices.
This creates cost push inflation.
Diagram Explanation – Cost Push Inflation
Cost push inflation is illustrated when the short‑run Aggregate Supply (SRAS) curve shifts left. This leads to higher price levels and lower output.
Examples of Cost Push Inflation
Oil Price Increases
Higher oil prices increase transportation costs.
Prices increase.
This creates cost push inflation.
Wage Inflation
Higher wages increase production costs.
Prices increase.
This causes cost push inflation.
Difference Between Cost Push Inflation and Demand Pull Inflation
| Feature | Demand Pull Inflation | Cost Push Inflation |
|---|---|---|
| Cause | Excess demand | Higher production costs |
| Supply Impact | AD > AS | AS shifts left |
| Output | Can increase | Often decreases |
| Price Level | Rises | Rises |
Understanding cost push inflation demand pull inflation requires comparing both types.
Similarities Between Cost Push Inflation and Demand Pull Inflation
Both cost push inflation demand pull inflation:
- Increase prices
- Reduce purchasing power
- Affect living standards
Both types influence economic policy.
Why Understanding Cost Push Inflation and Demand Pull Inflation Matters
Understanding cost push inflation demand pull inflation helps:
- Students explain inflation
- Governments design policies
- Businesses plan pricing
Both types of inflation affect economic stability and policy.
Government Policies to Control Inflation
Monetary Policy
Central banks reduce inflation by:
- Increasing interest rates
- Reducing money supply
Monetary policy tools are covered in more detail in our inflation fundamentals article What is Inflation – Definitions, Types, Causes
Fiscal Policy
Governments reduce inflation by:
- Reducing spending
- Increasing taxes
Supply Policies
Governments increase production capacity.
This reduces inflationary pressures.
Real‑World Examples
Demand Pull Inflation Example
When economies grow rapidly:
Demand increases.
Prices increase.
This is demand pull inflation.
Cost Push Inflation Example
When fuel prices increase:
Transportation costs increase.
Prices increase.
This is cost push inflation.
Conclusion
Both types explain inflation in real economic settings.
Quick Revision Notes
Cost push inflation:
- Caused by rising costs
- Supply decreases
Demand pull inflation:
- Caused by rising demand
- Demand increases
Questions & Answers
What is demand pull inflation?
Demand pull inflation occurs when demand increases faster than supply.
What is cost push inflation?
Cost push inflation occurs when production costs increase.
What is the difference between cost push inflation and demand pull inflation?
Demand pull inflation is caused by excess demand, while cost push inflation is caused by increased production costs.
