Cost Push and Demand Pull inflation : Causes and Controls

Inflation  refers to a persistent and continues rise in the general price.There are basically 2 main types of inflation,Cost push and Demand pull inflation.

 

Cost Push Inflation

Cost push inflation occurs when cost of production increases and firms increases prizes in order to maintain their profit level.

Causes of cost push inflation

Imported raw materials
If prizes of imported raw materials increases, this may make prizes final products of the raw material to rise and cause inflation.

Wages increases:
When wages increases due to perhaps to increases in the cost of living, this would result in increase in prices and inflation.

Increased indirect taxes
Taxes on goods and services increase cost of production leading to high prices may lead to inflation.

Increase in prices of factor input (factors of production)
If the prices of factors of production increases cost of production would rise and prices would increase as well . this may lead to inflation.

Low productivity
Where productivity in agriculture and industry is low, the cost per unit of output would be high. The prices of these output would equally be high and inflation my occur.

Increase in profit margins
Where firms desire to obtain high profit margins, they may raise prices to high level leading to inflation.

Control of cost push inflation

The price control of inputs
The prices of factors of production can be controlled, the government can set up the maximum prices at which factors of production can be sold these would help to reduce cost push inflation.

Wage freeze
The government may freeze wages so that wages would not increase to fuel the inflation.

Reduction of indirect taxes
If taxes of goods and services are reduced cost of reduction would fall and the rate of inflation reduced.

Subsidies
The government may subsidies production in order to reduce cost of production and inflation.

Increase productivity
If productivity is increased the cost per unit of output would reduce and this would also reduce inflation.

 

Demand pull inflation

Demand pull inflation occurs when aggregate demand exceeds, aggregate supply, it is usually caused by excessive purchasing power which pulls prices upwards.

Causes of demand pull inflation

During war times less customers goods are produce relative to equipment’s for war such as guns, ammunition etc. the increase in total income and reduction in consumer goods leads to demand pull inflation.

Increase lending by the banks:

if the commercial banks give more credit to their customers aggregate will rise and inflation may resolve.

Increase government spending:

This may lead to inflation, this usually occurs when the government spends more than the revenue it obtains from taxes.

Fall in productivity:

Where productivity is low supply will be low. The general demand for goods will exceeds the supply leading to inflation.

 Expert promotion:

Increase in export may reduce the goods available in the domestic market. Increase in export however leads to increase income and spending power in the domestic economy. Aggregate demand will therefore aggregate supply causing inflation.

Reduce direct taxes :

Reduction of taxes income taxes, income disposable income may cause inflation.

Control of demand pull inflation.

The major to control demand-pull inflation includes monetary policy and fiscal policy

 Contractionary monetary policy

these involves majors by the central bank to reduce monetary supply. They include majors such as raising the bank rate, selling government securities or raising the cash ration.

 Contractionary fiscal policy

The government can increase direct taxes(e.g income taxes) to reduce disposable income. This will reduce total demand and also inflation. The government can also reduce its spending which will also reduce total demand and inflation

Wage freeze

The government could freeze wages in other to reduce pressure on prices and reduce inflation.

Reduction in the power of trade unions:

The government can use laws to reduce the powers of trade unions to embark on sticks and to ask for higher wages.

Increased productivity:

Increased productivity would increase the supply of goods and services to match demand. This would reduce inflation.

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