The difference between these two types of inflation is
found in their causes. Both have the same effects (increasing price level), but they
are caused by different things.
Demand-pull inflation is
caused by excess demand. When the people as a whole get more money they are able to pay
more for goods and services (unless more goods and services are produced). Economists
talk about more money "chasing" the same amount of goods and services. This causes
shortages and prices rise.
Cost-push inflation is caused by
disruptions in supply. These disruptions cause increases in the price of production.
That leads to inflation. For example, a rise in the price of oil causes practically all
production to become more expensive.
There is no technical
way to determine for sure which kind of inflation is going on. Analysts must simply
look around to try to see if the money supply is increasing or if there are supply
shocks. Then they have to make informed guesses about why the inflation is
happening.
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