What is demand-pull inflation?

Demand-pull inflation occurs when the aggregate demand for goods and services in an economy outpaces aggregate supply, leading to price increases. This scenario typically unfolds in a robust economy where consumers are eager to spend, businesses are experiencing high demand, and resources are being utilized to their fullest extent.

When consumer demand rises significantly, often due to increased consumer confidence or higher incomes, businesses may struggle to keep up with this demand. In response, they may raise prices, resulting in inflation. This phenomenon is particularly prevalent during periods of economic expansion when there is an influx of money circulating in the economy, coupled with optimistic consumer behavior. Ultimately, the key feature of demand-pull inflation is that the price increases are driven by consumer demand rather than by production costs or other factors.