What is the difference between demand-pull and cost-push inflation, and why is it important to know which one is happening?
Answer (1)
Demand-pull inflation and cost-push inflation are two different reasons why prices increase in an economy, and understanding the difference is important for both the government and the public.Demand-pull inflation happens when too many people are spending and there aren’t enough goods or services to match the demand. This usually occurs when the economy is doing well—people have jobs, incomes are rising, and businesses are growing. For example, during holiday seasons in the Philippines, many people buy gifts, food, and clothes. If supply cannot keep up, prices go up because sellers know buyers are willing to pay more.On the other hand, cost-push inflation happens when the cost of producing goods goes up, even if demand stays the same. Businesses then pass these costs on to consumers through higher prices. A real-life example of this is when fuel prices rise. In 2022, oil prices went up globally, and this caused an increase in food and transport costs in the Philippines. Even if people weren’t buying more, prices still rose because of higher production and delivery expenses.Knowing the difference matters because the solutions are different. If the government thinks inflation is caused by demand-pull, it might raise interest rates to slow down spending. But if the inflation is cost-push, raising interest rates could hurt the economy more—because people are already struggling with high costs. Instead, the solution may be to provide support to producers, reduce import taxes, or improve local supply.In short, demand-pull inflation is caused by too much spending, while cost-push inflation is caused by rising production costs. Understanding which one is happening helps the government create the right policy response to protect people and support the economy.
