Definition
Demand pull inflation exists when aggregate demand for a good or service exceeds aggregate supply. It starts with an increase in consumer demand. Sellers meet such an increase with more supply. But when additional supply is unavailable, sellers raise their prices. That results in demand-pull inflation.
Causes of demand pull inflation
1. Growing economy – when the families spend more instead of savings and feel confident to take more debt. They expect better jobs and rise. This leads to a steady increase in demand, which means higher prices.
2. Expectation of inflation – once people expect inflation in future, they tend to buy more to avoid higher prices. This leads to increase in demand and creates demand-pull inflation. It’s difficult to eradicate once the expectation of inflation sets in.
3. Over expansion of the money supply – this happens when too much money chasing too few goods. An expansion of the money supply with too few goods to buy makes prices increase.
4. Discretionary fiscal policy – according to Keynesian economic theory, government spending drives up demand. Demand increases when government lowers taxes. When consumers have more discretionary income to spend on goods and services it creates inflation.
5. Strong brand – Marketing can create high demand for certain products, a form of asset inflation. This leads to charge high prices
6. Technological innovation – a company owns the market when it creates new technology until other companies figure out how to copy it. People demand new technology that creates real improvement in their daily lives.
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