Inflation sources and stakeholder effects
| English | Español |
|---|---|
| demand-pull inflation/dɪˈmænd pʊl ɪnˈfleɪʃn/ | inflación de demanda |
| cost-push inflation/kɒst pʊʃ ɪnˈfleɪʃn/ | inflación de costos |
A decision you can investigate
- Prices can rise because spending expands or because producing goods becomes more costly. Prices can fall because demand weakens or because productivity improves.
- The cause changes the output effect and the policy trade-off.
Build the explanation
- Demand-pull inflation · Inflación por demanda 需求拉动型通胀 follows higher aggregate spending relative to capacity. In an upward-sloping SRAS region, an AD increase can raise output and the price level. Cost-push inflation 成本推动型通胀 follows an adverse supply change, such as higher energy costs: the price level rises while output can fall. Excessive money growth can support nominal spending beyond real capacity, but velocity, credit, confidence and spare capacity affect the outcome.
- Deflation can follow weaker AD or contraction of money/spending; an outward AS shift can instead lower prices while real output rises. An AD/AS diagram uses the general price level and real national output, not one product’s price and quantity. Explain the source and assumptions before applying the picture.
Work through the evidence
- In a fictional fixed-nominal-wage case, a worker receives 100 and the price index rises from 100 to 110. Real wage at base prices=100/110×100≈90.91: purchasing power falls about 9.09%, not exactly 10%. A fixed nominal debt repayment also buys fewer goods after an unexpected price rise; the debtor may gain and creditor lose in real terms, with unchanged contract terms.
- If nominal wages rise 12% while the price level rises 10%, real wages change by 1.12/1.10−1≈1.82%. Nominal growth alone cannot identify the real outcome. Under deflation, fixed nominal debt becomes heavier in real terms; delayed purchases and weak revenue can harm firms, but productivity-driven cheaper supply need not produce the same output decline.
What is the real value of the fixed 100 wage after index 110?
Deflate the unchanged nominal wage using 100/110×100.
Which change matches a standard cost-push diagram?
An adverse SRAS shift can raise the price level and reduce output.
All deflation is necessarily caused by collapsing demand.
A supply/productivity improvement can also lower the general price level.
Test the limits
- Consumers’ outcomes depend on income adjustment and baskets. Workers with indexed wages differ from fixed-wage workers. Firms may face input costs, demand and repricing costs; uncertain inflation can complicate investment. Government may face indexed spending, changing nominal revenue and real debt burdens. Income distribution shifts according to contracts and asset holdings.
- Domestic inflation relative to trading partners can weaken price competitiveness and the current account, but exchange rates, quality and elasticities matter. Do not state that inflation always improves profits, reduces every wage or worsens trade. Stable expected low inflation differs from an unexpected or volatile increase.
What happens to real wages when nominal wages rise 12% and prices 10%?
Divide the nominal growth factor 1.12 by the price factor 1.10.
Apply and explain your answer
- Why can a fall in prices coincide with either falling or rising real output?
- A fall in AD can lower prices and output; an increase in AS can lower prices while raising output.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- demand-pull inflation: Price-level pressure from aggregate spending expanding relative to capacity.
- cost-push inflation: Price-level pressure caused by higher production costs or an adverse supply change.
In a fictional fixed-nominal-wage case, a worker receives 100 and the price index rises from 100 to 110. Real wage at base prices=100/110×100≈90.91: purchasing power falls about 9.09%, not exactly 10%. A fixed nominal debt repayment also buys fewer goods after an unexpected price rise; the debtor may gain and creditor lose in real terms, with unchanged contract terms. If nominal wages rise 12% while the price level rises 10%, real wages change by 1.12/1.10−1≈1.82%. Nominal growth alone cannot identify the real outcome. Under deflation, fixed nominal debt becomes heavier in real terms; delayed purchases and weak revenue can harm firms, but productivity-driven cheaper supply need not produce the same output decline.
Consumers’ outcomes depend on income adjustment and baskets. Workers with indexed wages differ from fixed-wage workers. Firms may face input costs, demand and repricing costs; uncertain inflation can complicate investment. Government may face indexed spending, changing nominal revenue and real debt burdens. Income distribution shifts according to contracts and asset holdings. Domestic inflation relative to trading partners can weaken price competitiveness and the current account, but exchange rates, quality and elasticities matter. Do not state that inflation always improves profits, reduces every wage or worsens trade. Stable expected low inflation differs from an unexpected or volatile increase.
Demand-pull inflation follows higher aggregate spending relative to capacity. In an upward-sloping SRAS region, an AD increase can raise output and the price level. Cost-push inflation follows an adverse supply change, such as higher energy costs: the price level rises while output can fall. Excessive money growth can support nominal spending beyond real capacity, but velocity, credit, confidence and spare capacity affect the outcome.