1. DEMAND PULL INFLATION

Demand pull inflation arises due to higher demand for goods and services over the available supply. Higher demand for goods and services arises due to increase in income of the people, increase in money supply and change in the taste and preference of people etc. In other words, demand pull inflation takes place when increase in production lags behind the increase in money supply.

2. COST PUSH INFLATION

Price rise due to increased input costs like raw material, wages, profit margin etc., is called Cost push inflation.

Both demand pull inflation and cost push inflation are affected by forces of demand and supply.

FACTORS AFFECTING DEMAND

1. Increase in Money Supply

Increase in money supply leads to price rise. More money available with people induces people to purchase more goods and services. It means there is an increase in demand. So, prices move upward.

2. Increase in Disposable Income

The increase in the disposable income leads to higher spending on the part of households. It hikes the level of price.

3. Cheap Monetary Policy

Cheap monetary policy means loan availability at very low interest rate and at easy terms. It leads to more investment by investors with loaned money. It pushes up the demand for capital goods and rise in price of the same.

4. Increase in Public Expenditure

Increase in government expenditure over its income, leads to deficit budget. Increase in government spending increases the demand for consumption and capital goods and services. It increases the price of both goods and services.

5. Repayment of Public Debt

The repayment of public debt borrowed by government to public leaves people with more money. It induces people to spend more. It ultimately leads to increase in price of goods and services.

FACTORS AFFECTING SUPPLY

1. Shortage of Factors of production

The shortage in the factors of production viz., land, labour, and capital increases the cost of production. For example, shortage in the labour leads to higher wages. It increases the cost of production and price of goods and services.

2. Industrial Disputes

Industrial disputes lead to strike or lay off. It affects the production and supply of goods.  It results in increased prices.

3. Natural Calamities

Natural calamities like earth quake, land slide and tsunami, affect production and supply of goods and services. The end result is price rise.

4. Artificial Scarcities

Artificial scarcities created by activities like hoarding and speculative trading in commodities in the commodities future market, results in price hike.

5. Increase in Exports

Increase in export of a particular commodity leads to shortage of goods in the domestic market. It pushes up prices.

6. International Factors

International factors like oil price hike, shortage in production of certain commodities leads to higher import prices.

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