.

1. Group members:
Priyanka
Sahil madan
Sushant dahiya
Shubham das
Bharti
Inflation: Cost Push And Demand Pull

3. CONTENTS
 About inflation
 Causes of inflation
 Types of inflation
 Effects of inflation
 Inflation rate
 Controlling inflation
 Conclusion & consequences of inflation

4. ABOUT INFLATION ??
• Inflation is persistent, continuous and
substantial a rise in general level of price
of goods and services in the country over
period of time,
• As the cost of goods and services
increase, the value of a currency declines
because the person won’t be able to
purchase as much with that currency as
they could have last month or year.
• It has worst impact on consumers

5. DEFINITIONS
 According to C.CROWTHER, “Inflation is State in which
the Value of Money is Falling and the Prices are rising.”
 In Economics, the Word inflation Refers to General
rise in Prices Measured against a Standard Level of
Purchasing Power.

6. CAUSES OF INFLATION
1. Cost Push Inflation Or
Supply Side Inflation
2. Demand Pull Inflation

7. 1. COST PUSH INFLATION
• Inflation caused by an increase in prices of inputs
like labour, raw material, etc. The increased price
of the factors of production leads to a decreased
supply of these goods. While the demand remains
constant, the prices of commodities increase
causing a rise in the overall price level. This is in
essence cost push inflation.
• example- if wages of workers are raised then the
unit cost of production also increases.

8. DIAGRAM SHOWING COST PUSH
INFLATION

9. CAUSES OF COST PUSH INFLATION
• Increased costs of raw materials
• Increased wages
• Failure to replace capital goods as they age,
reducing its productivity, or increasing
• Its maintenance costs
• Falling productivity of workers
• Higher Taxes. Higher VAT and Excise duties will increase the prices of goods. This
price increase will be a temporary increase.
• Higher Food Prices. In western economies food is a smaller % of overall spending,
but in developing countries, it plays a bigger role.

10.  Many cost push factors like rising energy prices, higher taxes,
effect of devaluation may prove temporary. Therefore, Central
Banks may tolerate a higher inflation rate if it is caused by cost
push factors. For example, in 2011, CPI inflation reached 5%, but
the Bank of England kept base rates at 0.5%. This shows they
are confident (hopeful) inflation will soon fall.
 Other economists may fear that temporary cost push factors may
influence inflation expectations. If people see higher inflation, they
may bargain for higher wages and thus the temporary cost push
inflation becomes sustained.
COST PUSH INFLATION – TEMPORARY
OR PERMANENT?

11.  The government could pursue deflationary fiscal policy (higher
taxes, lower spending) or monetary authorities could
increase interest rates. This would increase cost of borrowing
and reduce consumer spending and investment.
 The problem with using higher interest rates is that although it
will reduce inflation it could lead to a big fall in GDP.
 The long term solution to cost push inflation could be better
supply side policies which help to increase productivity and
shift the AS curve to the right. But, these policies would take a
long time to have an effect.
POLICIES TO REDUCE COST PUSH
INFLATION

12.  Inflation which arises due to various factors like rising income,
exploding population, etc., leads to aggregate demand and
exceeds aggregate supply, and tends to raise prices of goods
and services. This is known as demand-pull or excess
demand inflation
 This occurs when AD increases at a faster rate than AS.
Demand pull inflation will typically occur when the economy is
growing faster than the long run trend rate of growth. If
demand exceeds supply, firms will respond by pushing up
prices.
2. DEMAND-PULL INFLATION

13. DIAGRAM SHOWING DEMAND-
PULLINFLATION

14.  Increases in the money supply - This is one of the main focuses of the
Federal Reserve. If an economy has too much money among its citizens,
they will demand more product than firms can keep up with, pulling up prices.
 Increases in government spending - When the government spends large
amounts of money in the private sector through purchases and contracts, this
increases demand for products and creates supply issues, ultimately pulling
up prices.
 Foreign growth or foreign price increases - If prices are rising in other
countries, foreign consumers may demand the domestic products you buy at
cheaper rates. This increase in demand can result in higher prices paid by
you. If other countries experience large population growth, this can result in
foreign citizens demanding more products from other countries and pulling up
prices, too.
CAUSES OF DEMAND-PULLINFLATION

15.  The government could pursue deflationary fiscal policy (higher
taxes, lower spending) or monetary authorities could
increase interest rates. This would increase cost of borrowing
and reduce consumer spending and investment.
 The problem with using higher interest rates is that although it
will reduce inflation it could lead to a big fall in GDP.
 The long term solution to cost push inflation could be better
supply side policies which help to increase productivity and
shift the AS curve to the right. But, these policies would take a
long time to have an effect.
POLICIES TO REDUCE DEMAND PULL
INFLATION

16.  Though inflation cannot be distinctly related to the demand
pull and cost push inflation, it is important to understand them
so that corrective actions can be done to mitigate inflation.
 For example, where there is a greater element of demand pull,
then the government needs to ensure ready supply of goods
and services for example, asking producers/retailers not to
halt or hoard goods respectively.
SALIENT POINTS

17. TYPES OF INFLATION
• Inflation based on Coverage or scope:
• Comprehensive or Economy-Wide Inflation, and
• Sporadic Inflation.
• Inflation based on Time of occurrence:
• War-Time Inflation,
• Post-War Inflation, and
• Peace-Time Inflation.
• Inflation based on Government's reaction or control:
• Open Inflation, and
• Suppressed or Repressed Inflation.
• Inflation based on Rising prices:
• Creeping, Mild or Low Inflation,
• Chronic or Secular Inflation,
• Walking or Trotting Inflation,
• Moderate Inflation,
• Running Inflation,
• Galloping or Jumping Inflation, and
• Hyperinflation.

18. Effects of inflation
 Investment
 Interest rates
 Exchange rates
 Unemployment
 Stocks
 Decrease in the purchasing power
 Change the allocation of income

19. CONTROLLING INFLATION
There are broadly two ways of controlling inflation in an
economy:

1). Monetary measures
2). Fiscal measures

20. 1. Monetary policy
 Credit Control
 Demonetization of Currency
 Issue of New Currency
2. Fiscal policy
 Reduction in Unnecessary Expenditure
 Increase in Taxes
 Increase in Savings
 Surplus Budgets
 Public Debt
3. Other Measures
 To Increase Production
 Rational Wage Policy
 Price Control

21. CONCLUSION & CONSEQUENCES OF INFLATION
 Adverse effect on production
 Adverse effect on distribution
of income
 Obstacle to development
 Changes in relative prices
 Adverse effect on the B.O.P
In reality, low inflation rate and an upward economic growth is never
possible. Nevertheless, low inflation rate means slow economic growth.
Whenever, money is in excess, there is bidding by the consumers due to
which the cost of goods escalate.