Business

Difference between demand inflation and cost inflation

Main difference

Inflation is defined as the general increase in prices that results in a fall in the purchasing value of money. The developing country faces some severe economic challenges and inflation is one of the toughest of them. There may be several factors or reasons behind the inflation in the country, although the experts in the country evaluate factors and try to decrease them as soon as possible. Mainly, there are two main causes of inflation, one is the demand for raw materials and products, and the other is the supply of raw materials and products. In some of the situations, both supply and demand together can be the cause of inflation. Inflation caused by factors on the demand side is known as demand inflation. On the other hand,

Comparison chart

demand inflation cost inflation
Definition Demand inflation is the type of inflation in which aggregate consumer demand exceeds aggregate supply. Cost inflation is the type of inflation in which the supply of goods and services decreases and the price increases due to the increase in the prices of the factors of production.
Explain Demand inflation attempts to explain the phenomenon of how inflation starts. Cost-push inflation deals with the idea of ​​hardship faced while eliminating inflation once it starts.
caused due to Demand inflation is due to the increase in the money supply, which can be due to various factors, including increased investments, decreased savings, and others. Cost inflation is due to the appearance of monopoly groups in the market.
Policies To eliminate demand-driven inflation, revisions in fiscal and monetary policies must be made. The income policy and the administrative price control policy must be reviewed and modified according to the need of the hour.

What is demand-driven inflation?

Demand inflation is one of the main types of inflation caused by demand side factors within the particular country or area. In this type of inflation, aggregate demand exceeds aggregate supply. In this type of situation, the buyer, who can be mainly classified into four sections: governments, companies, households and foreign buyers, strives to buy the limited products and services available. Buyer or consumer demand exceeds supply in this type of scenario, and the economy cannot produce the products or raw materials required by consumers. In other words, we can explain this situation as “too much money chasing too few goods.” Developing or expanding countries that are witnesses face these types of economic obstacles. The real problems behind demand inflation are monetary and real factors. Demand inflation is eliminated by closely observing the monetary and fiscal policies recommended by experts. When the economy witnesses an increase in the money supply compared to the level of production, then this type of demand-driven inflation is due to monetary factors. On the contrary, if increased investments cause demand inflation, falling tax rates, decreasing savings and other similar factors it is known as demand inflation due to real factors. then this type of demand-driven inflation is due to monetary factors. On the contrary, if increased investments cause demand inflation, falling tax rates, decreasing savings and other similar factors it is known as demand inflation due to real factors. then this type of demand-driven inflation is due to monetary factors. On the contrary, if increased investments cause demand inflation, falling tax rates, decreasing savings and other similar factors it is known as demand inflation due to real factors. then this type of demand-driven inflation is due to monetary factors. On the contrary, if increased investments cause demand inflation, falling tax rates, decreasing savings and other similar factors it is known as demand inflation due to real factors. then this type of demand-driven inflation is due to monetary factors. On the contrary, if increased investments cause demand inflation, falling tax rates, decreasing savings and other similar factors it is known as demand inflation due to real factors.

What is cost-driven inflation?

Cost-push inflation is the type of inflation that occurs due to supply-side factors within the specific country or area. In this type of inflation, the decrease in product supply directly harms the needs and demands of consumers. As supply falls or shrinks, it translates directly into higher prices for goods. The increase in the general level of prices or the decrease in supply are produced by various factors. Most prominently, cost inflation occurs due to shortages of inputs and rising prices of factors of production. The push in the term ‘cost inflation’ actually denotes increases in the cost of production, which directly affects the decline in the aggregate supply of products and services. The increase in cost is due to the increase in the factors of production, that is, labor, capital, entrepreneurship and land. There may be one or more factors of production involved in raising the prices of goods and services. The main cause of cost inflation is the monopoly established by the groups within the market. Cost inflation can be removed after the revenue policy and administrative price control policy are reviewed and modified as required.

Demand-Driven Inflation vs. Cost-Driven Inflation

  • Demand inflation is the type of inflation in which aggregate consumer demand exceeds aggregate supply. Contrary to this, cost inflation is the type of inflation in which the supply of goods and services decreases and the price increases due to the increase in the prices of the factors of production.
  • Demand-driven inflation tries to explain the phenomenon of how inflation starts, while cost-driven inflation deals with the idea of ​​the difficulties faced in eliminating inflation once it starts.
  • Demand inflation is due to the increase in the money supply, which can be due to various factors, including increased investments, decreased savings, and others. On the contrary, cost-push inflation is due to the emergence of monopoly groups in the market.
  • In order to eliminate demand-driven inflation, revisions in fiscal and monetary policies must be made, while income policy and administrative price control policy must be reviewed and modified according to the needs of the moment.

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