The ensuing post-pandemic era witnessed an increase in airline ticket and hotel room prices. This phenomenon was a direct consequence of growing tourism and supply shortages, such as staffing issues in the travel sector. The spectrum of demand-pull inflation, from post-war rebounds to the impacts of global health crises, illustrates the complexity of these economic dynamics.
This inflation type occurs as the demand for products and services outstrips their supply, thus escalating their prices. In sharp contrast to cost-push inflation, demand-pull inflation pinpoints demand-side excesses. At the same time, the FED over-expands the money supply by lowering the Fed Funds rate to 1% to combat recession post the dot-com bubble.
Cost-Push Effect
The inflation rate is calculated as the average price increase of a basket of selected goods and services over one year. High inflation means that prices are increasing quickly, while low inflation means that prices are growing more slowly. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases. The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government spending can increase aggregate demand, thus raising prices. The Keynesian school believes inflation results from economic pressures such as rising costs of production or increases in aggregate demand.
How Demand-Pull Inflation Affects Consumers
If the money supply is increased by the central bank, consumer spending and aggregate demand increase as well. This can be caused by a number of factors, including an increase in population, an increase in government spending, or an increase in the money supply. Aggregate supply is the total volume of goods and services produced by an economy at a given demand pull inflation meaning price level.
When there is more money available to spend, each individual dollar has less purchasing power. Two of the main drivers of inflation are cost-push inflation and demand-pull inflation. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator.
- Through this concerted strategy, inflationary increments are effectively contained.
- Supply pull inflation, on the other hand, occurs when there is an increase in the price of resources due to scarcity.
- Consumers start demanding more goods and services, leading to an increase in AD.
- Government sponsorship of mortgage guarantors Fannie Mae and Freddie Mac also stimulated demand.
Meaning of Inflation, Deflation, and Disinflation
This type of inflation is a witch’s brew of economic adversity, combining poor economic growth, high unemployment, and severe inflation all in one. The association between demand-pull inflation and the Phillips curve transcends simplicity. In the interim, an apparent trade-off between inflation and joblessness emerges, aligning with the curve’s graph.
How Inflation Impacts Prices
Prices rise, which means that one unit of money buys fewer goods and services. This loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation’s money supply growth outpaces economic growth. Countering demand-pull inflation would be achieved by the government and central bank implementing contractionary monetary and fiscal policies. This would include increasing the interest rates, decreasing government spending, and increasing taxes, all measures that would reduce demand. As the constraints of the COVID-19 pandemic loosened, a surge in travel commenced.
Global prices of certain key commodities rose sharply and kinks developed in the supply chain. By 2022, workers were successfully pressing for higher pay to cope with rising consumer prices. Price increases to cover the costs of higher pay pushed inflation higher. Looking again at the price-quantity graph, we can see the relationship between aggregate supply and demand. If aggregate demand increases from AD1 to AD2, this will not change aggregate supply in the short run. Instead, it will cause a change in the quantity supplied, represented by a movement along the AS curve.
