Demand-Pull Inflation occurs when aggregate demand outpaces aggregate supply in an economy. Basically the idea behind this concept is that as inflation rises so does real gross domestic products rise and the unemployment rate falls as the economy moves on the Phillips curve (Miller, 1997). Basically this is a case of having tons of money but not enough things to buy it with. Cost-Push Inflation occurs when there is a substantial increase in the cost of important goods or services where no suitable alternative is available (Miller, 1997). Basically, cost-push inflation is what the ecomony experienced in the recent oil crisis.
There was a decrease in the production of oil and that caused the prices of oil to increase. Gasoline companies that relied on the oil had to then pay more to get the oil they needed and they in turn passed on the increase of oil prices to the consumer by raising gas prices at the pumps. The basic difference between the two types of inflation is that demand-pull inflation is seen as constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion, while cost-push inflation is more of a “supply shock” inflation.
Inflation is measured using what are called indexes. One kind of index that is used to measure inflation is the consumer price index (CPI). The CPI is a measurement of the average price of consumer goods and services purchased by households. The percent change in the CPI is a measure of inflation Two basic types of data are needed when using the CPI index: price data and weighting data. The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times.
The weighting data are estimates of the shares of the different types of expenditure as fractions of the total expenditure covered by the index. These weights are usually based upon expenditure data obtained for sampled periods from a sample of households. Together the types of data helped give a clear picture of how inflation is effecting the economy. A second index that is used to measure inflation is the producer price index (PPI).
The PPI is a measurement of the average changes in prices received by domestic producers for their output.. PPI measures the pressure being put on producers by the costs of their raw materials. This could be “passed on” to consumers, or it could be absorbed by profits, or offset by increasing productivity. The PPI in this way will give a clearer idea of cost-pull inflation while it would seem that the CPI gives a clearer indication of demand-pull inflation (Miller, 1997).