Demand inflation is when the price increase associated with inflation is due to a significant change in demand. Four types of demand inflation can be distinguished from one another. What they all have in common is that they can be dealt with by means of contractive measures.
In this lesson we explain the main characteristics of demand inflation and how it can arise. Finally, we offer you a few practice questions that you can use to check your knowledge.
- Synonyms: Price Induced Inflation | Demand suction inflation
- English: Demand Pull Inflation
Why should you know demand inflation?
Since demand inflation is a special form of inflation that is quite common in practice, you should familiarize yourself with its causes and effects.
What causes demand inflation?
According to usvsukenglish, demand inflation occurs when the price level for a product, a certain type of goods or a service is significantly increased due to price increases as a result of higher demand. The demand thus exceeds the supply significantly and it is the company for a full utilization of their capacities not possible, the production must be increased accordingly.
This shortage of goods creates a greater willingness to pay on the part of customers, which prompts companies to increase prices. Demand inflation is therefore also known as price-induced inflation. Demand inflations usually occur in times of economic boom, as companies are already working at their capacity limits and can no longer respond to higher demand with an increase in production.
Variants of demand inflation
- Consumer inflation
- Investment inflation
- Government demand inflation
- Imported demand inflation
The situation described above is also known as consumer inflation. The supply remains constant while the demand increases.
This must be distinguished from investment inflation, in which investments in new capacities are increased as a result of rising demand, which in turn leads to increased demand for capital goods. So the problem shifts to another level.
Government demand inflation
A particularly common form of demand inflation is government demand inflation. The state’s expenditure on goods and services plays a decisive role here. High government spending is the trigger.
Imported demand inflation
In addition, there is also imported demand inflation, which is either the result of permanently high export surpluses or the dependence on raw material suppliers abroad.
Demand Inflation: A Comparison of Imported Inflation and Homemade Inflation
How can demand inflation be eliminated?
Demand inflation usually occurs during times of economic boom. In relation to individual sectors, however, they can also develop independently of the economic cycle. To combat a demand inflation contractionary measures are used. These are methods whose aim is to reduce the amount of money and credit available in the economy.
Contractive measures are:
- Reduction in demand on the part of the state with the aim of postponing investments to times of economic downturn.
- Increase in tax rates.
- Lending Restrictions.