Difference between Cost-Push Inflation and Demand-Pull Inflation
Basis |
Cost-Push Inflation |
Demand-Pull Inflation |
---|---|---|
Definition |
It occurs when overall prices rise due to increased production costs such as wages and raw materials, leading to a decrease in aggregate supply. |
Arises when aggregate demand surpasses aggregate supply, resulting from an increase in overall demand for goods and services. |
Causes |
An increase in the cost of input goods, rising labor costs, higher taxes, increased import prices, and a decrease in aggregate supply contribute to cost-push inflation. |
An expansionary economy, increased government spending, overseas growth, or rising consumer confidence leading to higher consumer spending can cause demand-pull inflation. |
Examples |
In 1973, OPEC’s oil production restriction caused oil prices to surge by 400%, leading to increased production costs and subsequent price hikes in oil-dependent industries, illustrating cost-push inflation. |
Excessive demand for goods and services during economic expansion or increased government spending can cause demand-pull inflation, resulting in a scenario where too many dollars chase too few goods. |
Fueled By |
Cost-push inflation is fueled by increased production costs, whereas demand-pull inflation is driven by changes in consumer demand. |
Cost-push inflation reduces aggregate supply due to higher production costs, while demand-pull inflation results from increased aggregate demand. |
Outcomes |
Cost-push inflation leads to price increases passed on from production costs. |
Demand-pull inflation results in price hikes due to excess demand. |