1. Inflation refers to the sustained increase in the general level of prices for goods and services over time.
  2. It leads to a decline in the purchasing power of money.
  3. There are two main types of inflation: Demand-pull inflation and Cost-push inflation.

Demand-pull Inflation

  1. Demand-pull inflation occurs when the aggregate demand in an economy exceeds its aggregate supply.
  2. This type of inflation is often described as "too much money chasing too few goods."
  3. It is commonly triggered by an increase in consumer spending, government expenditure, or investment.
  4. An expansionary fiscal or monetary policy can lead to excess demand, causing demand-pull inflation.
  5. High levels of employment and rising wages can further amplify demand-pull inflation.
  6. Examples of demand-side factors include tax cuts, lower interest rates, or increased public spending.
  7. Rapid economic growth often leads to demand-pull inflation.
  8. Demand-pull inflation can be controlled by tightening monetary policies like increasing interest rates or reducing the money supply.
  9. The Keynesian theory emphasizes that excess demand in an economy leads to demand-pull inflation.

Cost-push Inflation

  1. Cost-push inflation occurs when the cost of production for goods and services increases, leading to higher prices.
  2. It is triggered by rising costs of raw materials, wages, or energy.
  3. Cost-push inflation is often associated with supply-side disruptions or constraints.
  4. Supply shocks like natural disasters, geopolitical conflicts, or oil price hikes can cause cost-push inflation.
  5. Increased input costs compel producers to raise prices to maintain profit margins.
  6. Cost-push inflation reduces the economy’s output and leads to stagflation, a situation of high inflation and low growth.
  7. Examples include the oil crises of the 1970s, which led to global cost-push inflation.
  8. Supply-side reforms, such as improving productivity or reducing import dependency, can help address cost-push inflation.

Key Differences Between Demand-pull and Cost-push Inflation

  1. Demand-pull inflation is driven by increased demand, whereas cost-push inflation arises due to higher production costs.
  2. Demand-pull inflation is associated with a booming economy, while cost-push inflation often occurs during supply disruptions.
  3. Control measures for demand-pull inflation focus on demand management, while cost-push inflation requires supply-side interventions.

General Impacts of Inflation

  1. Inflation erodes the value of money and affects purchasing power.
  2. It impacts fixed-income groups, as their real income decreases.
  3. Inflation encourages speculative investments rather than productive ones.
  4. Moderate inflation is considered beneficial for economic growth, but high inflation leads to instability.
  5. Hyperinflation, a form of extreme inflation, can collapse an economy.

Monitoring and Controlling Inflation

  1. Central banks, like the Reserve Bank of India (RBI), monitor and control inflation using monetary policy tools.
  2. Inflation targeting is a common strategy used by central banks to maintain price stability.
  3. In India, the current inflation target is 4%, with a tolerance band of +/- 2%.
  4. Consumer Price Index (CPI) and Wholesale Price Index (WPI) are key indicators to measure inflation in India.
  5. Governments also use fiscal policies, such as reducing subsidies or increasing taxes, to control inflation.

Examples and Case Studies

  1. The post-pandemic inflation surge in many countries was a combination of demand-pull (due to stimulus packages) and cost-push (due to supply chain disruptions).
  2. The 1973 Oil Crisis is a classic example of cost-push inflation.
  3. The post-World War II period saw significant demand-pull inflation due to reconstruction and economic recovery efforts.

Category

Questions

  1. What is demand-pull inflation caused by?
  2. Cost-push inflation occurs due to...?
  3. Which of the following is a characteristic of demand-pull inflation?
  4. A sharp rise in oil prices often leads to which type of inflation?
  5. What is a common cause of demand-pull inflation?
  6. Which of these factors can trigger cost-push inflation?
  7. When aggregate demand exceeds aggregate supply, it results in...?
  8. What role does monetary policy play in controlling demand-pull inflation?
  9. A rise in the cost of raw materials primarily leads to...?
  10. Which type of inflation is associated with an overheating economy?
  11. Cost-push inflation is often caused by...?
  12. Demand-pull inflation is more likely to occur during...?
  13. Which inflation type is characterized by "too much money chasing too few goods"?
  14. The increase in aggregate demand due to high consumer confidence results in...?
  15. What is the Phillips Curve used to demonstrate?
  16. Supply shocks often result in...?
  17. Which type of inflation occurs when there is an increase in money supply without a corresponding rise in output?
  18. An increase in excise taxes is most likely to cause...?
  19. The Keynesian perspective on demand-pull inflation emphasizes...?
  20. What is the primary difference between demand-pull and cost-push inflation?
  21. Which factor is a driver of cost-push inflation?
  22. Wage increases that exceed productivity growth typically lead to...?
  23. When the economy operates at full employment, additional demand often leads to...?
  24. Which of the following is NOT a cause of demand-pull inflation?
  25. Which inflation type can be controlled by supply-side policies?
  26. A rise in global commodity prices typically leads to...?
  27. How can demand-pull inflation be reduced?
  28. Which inflation type occurs due to external factors such as import prices?
  29. What is a key feature of cost-push inflation?
  30. Which of the following is NOT a consequence of demand-pull inflation?