Demand-Pull Inflation: Definition, Theory, Causes & Examples

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  • 0:03 A Glance at…
  • 0:50 Demand-Pull Inflation Defined
  • 1:54 Causes of Demand-Pull…
  • 3:18 An Example
  • 3:59 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we'll learn about demand-pull inflation. We'll define it and learn what causes this type of inflation. An example and lesson summary will then be used to for clarification.

A Glance at Demand-Pull Inflation

Let's think for a moment about your favorite shampoo. You love the smell of it and the way it makes your hair soft. Simply nothing else will do. As usual, when you start to get low, you head off to the store to purchase another bottle like you have so many times before. You realize that there is only one bottle left, so you hurry up and grab it off the shelf and head to the counter to pay.

Only this time, when you reach for the $9 in your wallet to purchase the bottle of shampoo, you notice that you do not have enough money. You see, while you once paid $8.50 for your shampoo, the price has increased to $9.25. Sure you've noticed an increase in demand for your shampoo as word has gotten out about how great the product is, but why has the price increased? What you have experienced is demand-pull inflation.

Demand-Pull Inflation Defined

You may be wondering what is meant by the term demand-pull inflation. Before we define this term, it is important to first explain inflation. Inflation is how economists describe the increase in the general price level for goods. Keep in mind that this does not mean that when one particular item increases in price inflation has occurred. But rather, the term inflation is used when most of the prices for goods are increasing to some degree. So, demand-pull inflation is a theory that explains how inflation is affected by demand and supply.

With that, we can define demand-pull inflation as a type of inflation that occurs when the price level increases due to a greater demand for a good than there is supply available. When too many people want or demand a product, such as your favorite shampoo, and there is not enough supply to meet this demand, the price begins to rise. This is simply because too many people want to purchase more goods than can be supplied by the economy, forcing customers to compete for limited goods, thereby pushing prices up.

Causes of Demand-Pull Inflation

Lets now take a minute to look at what might cause demand-pull inflation to occur. The following list explains some common factors that contribute to this type of inflation:

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