Demand Pull Inflation takes place when the total demand for goods and services surpasses that of the total supply. In fact, Demand Pull Inflation occurs when there is exuberant growth in aggregate demand, followed by an inflationary disruption.
Demand Pull Inflation is characterised by an increase in the Gross Domestic Product (GDP) and reduction in the unemployment problem. It is at this phase, that the economy of a country can be said to be moving along the Phillips Curve. Generally, the theory of Demand Pull Inflation is associated with that of Keynesian economics.
Nature of Demand Pull Inflation:
- Ever since its inception, Demand Pull Inflation is monetary in nature. This is because the authorities in power permit the rise in money supply , more than the capacity of the economy to supply goods and services.
- Demand Pull Inflation is born out of the interaction between consumer demand and supply of products. In case the consumer demand concentrates on a rare product, it is natural for the price of such a product to rise. When this happens in the economy as a whole, then this is known as inflation.
- Demand Pull Inflation basically thrives on the escalation in the consumer demand on a continuous basis.
Demand Pull Inflation: How it occurs?
The Keynesian economics has explicit explanations about the causes of Demand Pull Inflation. According to Keynesian theory, the more the commercial firms of a country offer employment to people, there is more and more rise in the aggregate demand. This rise in demand enables the commercial firms to employ people further, in order to derive maximum output. Owing to restrictions of capacity, the output level would fail to meet the prevailing demand. Hence the prices of the products would automatically rise. Initially, there is a fall in the unemployment, which subsequently increases. On the other hand, increase in the demand for labor indicates that more workers are required by the commercial firms, to increase and maintain their output levels.