Understanding Demand Pull Inflation: When Prices Rise Due to High Demand

Understanding Demand Pull Inflation: When Prices Rise Due to High Demand

Have you ever wondered why the prices of everything, including basic necessities, keep skyrocketing over time? This economic phenomenon is widely known as inflation, and one of its two main types that has an essential role is demand pull inflation.

People Also Read: How Much Is The Inflation Rate In Indonesia? Here's The Details!

What is Demand Pull Inflation?


Source : Envato

First off, let's get to know the meaning of the demand pull inflation. When everyone wants to purchase a lot of goods, but there aren't enough on the market, that is known as demand pull inflation. As a result, prices skyrocket, and everything gets more expensive, making it more difficult for people to afford basic needs.

Theoretically, consumers tend to make more purchases when there are more employment and money to spend. This, of course, triggers an increase in demand for goods. To meet this demand, businesses must hire more people to produce more goods.

However, there are certain occasions when demand is so high that businesses struggle to meet the demand. Companies must raise prices to deal with this issue since everyone wants those products. This phenomenon is widely known as demand pull inflation.

How Does Demand Pull Inflation Happen?

Demand pull inflation can be triggered by five leading causes, such as:

  1. High consumer spending: When people own more money, they buy more products and services. This increased purchasing forces businesses to raise prices to continue keeping with the increasing demand.
  2. Government spending: The economy grows when the government spends more money on development projects. As a result, people will have more money to spend, increasing demand and increasing prices.
  3. Growing economy: A growing economy can also trigger a high demand pull inflation rate. During economic growth, the employment rate will rise, and so will the people's incomes. Naturally, people will buy more things which causes increased demand and prices.
  4. Low-interest rates: When interest rates drop, taking out loans becomes more affordable. This boosts the demand for goods and services by encouraging people to apply for more loans and spend more.
  5. Exports increase: When there is an increase in a country's exports, then more money will come to the country's economy. Meaning people will have more income, which causes more consumer spending.

Demand Pull vs Cost Push Inflation

Demand pull may seem similar to cost push inflation, but they work differently. Then, what are the differences between cost push inflation and demand pull inflation? 

Cost push inflation occurs when money flows from one economy's area to another. Businesses are forced to increase their prices as production expenses, like raw materials and labor costs, rise. As a result, consumers end up paying more for the stuff they purchase.

Meanwhile, demand pull inflation demonstrates why prices skyrocket in the first place, which is mainly because people demand more goods. On the other hand, cost push inflation shows how challenging it is to stop inflation once it has begun since rising expenses keep driving up prices.

Example of Demand Pull Inflation 

cost push inflation

Source : Envato

Let's look at a real-life situation to fully understand demand pull inflation. Imagine a popular vacation destination during the peak season. There is a high demand for accommodations, restaurants, and other entertaining establishments since visitors worldwide flock to the area.

Local companies notice this trend and understand that they are allowed to charge more because of the massive demand for their services. For instance, hotels may increase the cost of rooms, eating establishments may raise the price of menu items, and gift stores may increase the cost of souvenirs.

This noticeable price increase in all city areas is a classic case of demand pull inflation. It occurs due to high tourist spending, which prompts businesses to increase their prices to keep up with the high demand.

To wrap up, demand pull inflation significantly impacts the prices we pay for goods in our everyday lives. Due to the increasing demand in the market, higher costs for stuff affect us as consumers.

People Also Read: Understanding Cost Push Inflation: Definition, Causes, And Impact

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