Demand Push Inflation and Factors Behind It

Demand push inflation can be defined as inflation in which there is too much money which is chasing too few goods and hence prices rise because demand for goods and services is more than supply of goods and services. Factor which lead to demand push inflation are as follows –

1. An increase in government expenditure like various governments of the world did by giving economic stimulus packages so as to get out of recession.

2. A reduction in direct or indirect taxation: If taxes are reduced consumers will have more disposable income causing demand to rise. A reduction in indirect taxes (taxes on goods and services such as VAT) will mean that a given amount of income will now buy a greater real volume of goods and services.

3. A depreciation of the exchange rate which increases the price of imports and reduces the foreign price of exports. If consumers buy fewer imports because it is cheaper to buy in the home country than buy imported goods, while foreigners buy more exports because price will be less for same goods and services than that of their home country. If the economy is already at full employment, it is hard to increase output and prices of the goods and services rises.

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