Demand Pull Inflation

Demand pull inflation definition


Demand pull inflation is a condition in which the economy experiences increasing overall demand for goods and services; this, in turn, causes the price of those goods and services to rise. Demand pull inflation generally results from overall growth in the economy and is usually of relatively short duration. Economic expansion and growth typically leads to higher employment rates that increase the spending power of consumers and create increased demand for the goods and services available within the economy. Essentially, a larger pool of consumers vying for the same amount of goods and services will create scarcity that pulls prices upward until production increases to match demand.

Demand pull theory


In contrast to cost push inflation, which results from a scarcity of raw materials or an excess in the money supply domestically or globally, demand pull inflation is generally considered to be a result of growth and expansion in the economy and usually corrects itself within a short time. Reduced unemployment not only increases the number of consumers, but also the overall manufacturing capacity. For this reason, demand pull inflation typically is a self-correcting phenomenon; manufacturers increase production to meet the increased demand, and prices return to normal levels. Keynesian demand pull theory, however, argues that prices tend to stay slightly above their previous levels due to altered consumer expectations; these sticky prices can often create slight elevations in wages throughout the economy as well.


Demand pull inflation example


While demand pull inflation generally refers to overall price increases throughout the economy, one of the best known examples of demand pull inflation is the increased demand and skyrocketing prices of certain Christmas toys each year. In 1996, the popularity of Tyco’s Tickle Me Elmo doll created extreme consumer demand for the toys, taxing manufacturing capacity to its limits and allowing retailers to sell the dolls for much higher prices due to the increased demand and limited supply. Some Tickle Me Elmo dolls sold for up to eighty times the list price of $30, making it one of the most impressive examples of demand pull inflation in recent years. Zhu Zhu pets are another, less dramatic example; these cute and cuddly animatronic hamsters had a list price around $10, but sold for $80 to $90 during the height of demand for Christmas 2009.

Conclusions


Unlike cost push inflation, which usually indicates a serious underlying problem in the economy and can linger for months or even years, demand pull inflation typically is of short duration and is a side effect of economic expansion and low unemployment. For specific items, demand pull inflation causes inflated prices for an extremely short duration until supply catches up with demand. Overall, demand pull inflation represents a minor inconvenience in an otherwise robust and growing economy and requires no special action by government or banking institutions since it is self-correcting in a short amount of time.
<< Inflation
<< Deflation
<< Stagflation
<< Cost Push Inflation
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.