Account for the causes of demand-pull and cash-push inflation in your country

Answer

Causes of demand-pull inflation

Demand-pull inflation is when growing demand for goods or services meets insufficient supply, which drives prices higher or Rising prices caused by consumers wanting more goods than current supply

• A strong economy. When the economy is booming and unemployment is low, consumers tend to earn more income and spend more money, which drives up levels of aggregate demand throughout an economy.
• Increase in money supply. An increase in money supply leads to more demand and services relative to the supply of these commodities available. This leads to shooting prices due to excessive demand
• Supply shortfalls. Higher income and more spending drive growing demand, and companies respond by trying to increase supply to keep up. Waves of demand for raw materials, subcomponents and labor ripple through an economy, and it may take time for production to meet the demand.
• Inflation expectations. when consumers expect inflation to rise in the near future, they may pre-emptively start buying more things now to avoid paying what they expect will be higher prices later a period following   This can lead to a problem with supply, leading to demand-pull inflation.
• Government policy of reducing taxes on some essential goods increases people’s disposable income leading to excessive demand and rise in prices
• The low level of liquidity preference. When people’s desire to hold money is low, much of their earnings will have to be spent. This therefore leads to price increase
• Increase in government expenditure. If government expenditure is financed by borrowing from banks other than taxation (deficit financing), more money will be injected into the economy leading to price increase.
• Low marginal propensity to save. Reduced savings especially during conditions of full employment will cause demand and prices to increase
• Rural-urban migration causes high demand for consumer goods in urban areas
• Restriction of supply by monopolies and aligopolies. These lead to shortage in supply of some commodities leading to price increase

Causes of cost-push inflation

Cost-push inflation occurs when higher production costs push up the prices of goods and services

• High wages and salaries which are often influenced by government and trade unions and cause rise in cost of production
• Increasing prices of factors inputs such as raw materials will lead to an increase in prices of outputs
• The cost of transport of raw materials and finished good cause increase in prices
• High cost of borrowing associated with high interest rates increase the costs of production
• High levels of taxation on producers and importers
• High advertising costs
• High rent for business premises
• natural disasters, such floods, earthquakes, fires, or tornadoes leading to destruction of production facilities.