Demand-Pull Inflation vs Cost-Push Inflation
Too much money chasing goods versus rising production costs pushing prices up — two classic inflation mechanisms.
Start here
Demand-pull inflation is a price rise driven by aggregate demand exceeding supply at full employment; cost-push inflation is a price rise driven by higher input costs such as wages, oil, and import prices.
Diwali sales boom with unchanged supply? Prices rise from demand-pull. Crude oil jumps and truck diesel costs more — transport charges rise even if demand is flat — that is cost-push.
Policy response differs: demand-pull may need monetary tightening; cost-push may need supply-side fixes or targeted subsidies.
Side-by-side comparison
| Feature | Demand-Pull Inflation | Cost-Push Inflation |
|---|---|---|
| Indian examples | Post-COVID revenge spending on travel | 2022 crude spike, rupee at 80+, wheat export ban ripple |
| Graph shift | AD curve shifts right | AS curve shifts left |
| RBI tool efficacy | Rate hikes effective if demand-driven | Less effective — may slow growth without fixing supply shock |
| Phillips Curve | Inflation ↑, unemployment ↓ (typical) | Inflation ↑, unemployment ↑ (stagflation risk) |
| AD-AS shift | Aggregate demand curve shifts right | Aggregate supply curve shifts left |
| Indian policy example | RBI repo hikes during festive demand surge | MSP hikes + crude shock widening food/fuel CPI |
At a glance
Cause
AD > AS at full employment
Rising wages, raw material, import costs
Classic phrase
“Too much money chasing too few goods”
“Wage-price spiral” / supply shock
Policy response
Monetary tightening, fiscal restraint
Supply management, forex, targeted relief
Unemployment effect
Typically low unemployment context
Can cause stagflation — inflation + unemployment
Paneer shortage vs LPG price hike
During a wedding season in Delhi, paneer demand doubles but supply is fixed — shopkeepers raise prices from ₹400 to ₹480/kg (demand-pull). Separately, global LNG prices spike; Amul raises milk procurement costs, and paneer production cost rises even in off-season — prices rise despite normal demand (cost-push via input costs). RBI repo hikes work better on demand-pull; cost-push from oil needs different tools.
What this means for the exam
Demand-pull = excess demand | Cost-push = higher input/production costs.
Understand the difference
India often faces both simultaneously
MSP hikes (cost-push for food) can coincide with rural demand recovery (demand-pull). Headline CPI mixes both — understanding drivers helps in Mains answers on MPC decisions.