Inflation
▪ Inflation refers to the rise in the prices of most goods and services of daily
or common use, such as food, clothing, housing, recreation, transport,
consumer staples, etc.
▪ Inflation may be defined as ‘a sustained upward trend in the general
level of prices’ and not the price of only one or two goods.
▪ G. Ackley defined inflation as ‘a persistent and appreciable rise in
the general level or average of prices’. In other words, inflation is a
state of rising prices, but not high prices.
1
,▪ Inflation as “a state in which the value of money is falling i.e. prices are
rising”.
▪ Inflation is a purely monetary phenomenon.
2
, Demand Pull Inflation Vs Cost- Push Inflation
According to the demand-pull theory, prices rise in response to an excess
of aggregate demand over existing supply of goods and services. The
demand pull theorist point out that inflation (Demand-pull) is caused by
an increase in the quantity of money, when the economy is
operating at full employment level. As the quantity of money increases,
the rate of investment will fall and, consequently, investment will
increase. This increased investment expenditure will soon
increase the income of the various factors of production. As a
result, aggregate consumption expenditure will increase leading to an
effective increase in the effective demand. With the economy already
operating at the full employment level, this will immediately, raise
prices, and inflationary forces may emerge.
Thus, when the general monetary demand rises faster than the general
supply, it pulls up prices commodity prices and factor prices.
3
, ✓ Demand pull inflation, therefore, manifests itself when there is active
cooperation or passive collusion, or a failure to take counteracting
4
▪ Inflation refers to the rise in the prices of most goods and services of daily
or common use, such as food, clothing, housing, recreation, transport,
consumer staples, etc.
▪ Inflation may be defined as ‘a sustained upward trend in the general
level of prices’ and not the price of only one or two goods.
▪ G. Ackley defined inflation as ‘a persistent and appreciable rise in
the general level or average of prices’. In other words, inflation is a
state of rising prices, but not high prices.
1
,▪ Inflation as “a state in which the value of money is falling i.e. prices are
rising”.
▪ Inflation is a purely monetary phenomenon.
2
, Demand Pull Inflation Vs Cost- Push Inflation
According to the demand-pull theory, prices rise in response to an excess
of aggregate demand over existing supply of goods and services. The
demand pull theorist point out that inflation (Demand-pull) is caused by
an increase in the quantity of money, when the economy is
operating at full employment level. As the quantity of money increases,
the rate of investment will fall and, consequently, investment will
increase. This increased investment expenditure will soon
increase the income of the various factors of production. As a
result, aggregate consumption expenditure will increase leading to an
effective increase in the effective demand. With the economy already
operating at the full employment level, this will immediately, raise
prices, and inflationary forces may emerge.
Thus, when the general monetary demand rises faster than the general
supply, it pulls up prices commodity prices and factor prices.
3
, ✓ Demand pull inflation, therefore, manifests itself when there is active
cooperation or passive collusion, or a failure to take counteracting
4
