Demand Pull Inflation: The term demand-pull inflation usually describes a widespread phenomenon. That is, when consumer demand outpaces the available supply of many types of consumer goods, demand-pull inflation sets in, forcing an overall increase in the cost of living. When demand surpasses supply, higher prices are the result. This is demand-pull inflation. A low unemployment rate is unquestionably good in general, but it can cause inflation because more people have more disposable income. Increased government spending is good for the economy
Cost Push Inflation: Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy. Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating cost-push inflation.
The most common cause of cost-push inflation starts with an increase in the cost of production, which may be expected or unexpected. For example, the cost of raw materials or inventory used in production might increase, leading to higher costs.
Cost-Push vs. Demand-Pull
Rising prices caused by consumers is called demand-pull inflation. Demand-pull inflation includes times when an increase in demand is so great that production can’t keep up, which typically results in higher prices. In short, cost-push inflation is driven by supply costs while demand-pull inflation is driven by consumer demand—while both lead to higher prices passed onto consumers.