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Factors of Demand-Pull Inflation. Cost-Push Inflation. By Kimberly Amadeo. Learn about our editorial policies. Updated November 10, Reviewed by Charles Potters. Article Reviewed August 28, Charles is a nationally recognized capital markets specialist and educator with over 30 years of experience developing in-depth training programs for burgeoning financial professionals.
Charles has taught at a number of institutions including Goldman Sachs, Morgan Stanley, Societe Generale, and many more. Learn about our Financial Review Board. The housing market, for example, has seen its ups and downs over the years. If homes are in demand because the economy is experiencing an expansion, home prices will rise.
The demand also impacts ancillary products and services that support the housing industry. Construction products such as lumber and steel, as well as the nails and rivets used in homes, might all see increases in demand resulting from higher demand for homes.
Expansionary fiscal policy by governments can increase the amount of discretionary income for both businesses and consumers. If a government cuts taxes, businesses may spend it on capital improvements, employee compensation, or new hiring. Consumers may purchase more goods as well. The government could also stimulate the economy by increasing spending on infrastructure projects. The result could be an increase in demand for goods and services, leading to price increases.
Expansionary monetary policy by central banks can lower interest rates. Central banks like the Federal Reserve can lower the cost for banks to lend, which allows banks to lend more money to businesses and consumers. The increase in money available throughout the economy leads to more spending and demand for goods and services.
There are a few metrics that are used to measure the inflation rate. One of the most popular is the Consumer Price Index CPI , which measures prices for a basket of goods and services in the economy, including food, cars, education, and recreation. In April , the Consumer Price Index increased 0. When compared to the year prior, the full index increased 4. Another measure of inflation is the Producer Price Index PPI , which reports the price changes that affect domestic producers.
The PPI measures prices for fuel, farm products meats and grains , chemical products, and metals. If the price increases that cause the PPI to spike get passed onto consumers, it will be reflected in the Consumer Price Index. While consumers experience little benefit from inflation, investors can enjoy a boost if they hold assets in markets affected by inflation.
For example, those who are invested in energy companies might see a rise in their stock prices if energy prices are rising. Some companies reap the rewards of inflation if they can charge more for their products as a result of a surge in demand for their goods. If the economy is performing well and housing demand is high, home-building companies can charge higher prices for selling homes.
In other words, inflation can provide businesses with pricing power and increase their profit margins. If profit margins are rising, it means the prices that companies charge for their products are increasing at a faster rate than increases in production costs. Also, business owners can deliberately withhold supplies from the market, allowing prices to rise to a favorable level.
However, companies can also be hurt by inflation if it's the result of a surge in production costs.
Companies are at risk if they're unable to pass on the higher costs to consumers through higher prices. If foreign competition, for example, is unaffected by the production cost increases, their prices wouldn't need to rise. As a result, U. Bureau of Labor Statistics.
Outlook and strategies are subject to change without notice. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the author but not necessarily those of PIMCO, and such opinions are subject to change without notice.
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No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Saved Content And Share Content. My Content You have not saved any content. Share Subscribe. Manage Subscriptions. Your Email Address. Recipient Email Address Please enter valid address Email address is required. My Account Manage Subscriptions. Cost-push inflation in context Both higher oil prices and depreciation of currency have previously caused cost-push inflation.
Example of Higher Oil Prices First, gasoline, or petrol, prices rise. Outlook and strategies are subject to change without notice PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Cancel OK. In the short run, businesses cannot significantly increase production and supply S remains constant. The economy's equilibrium moves from point A to point B and prices will tend to rise, resulting in inflation. Cost-push inflation, on the other hand, occurs when prices of production process inputs increase.
Rapid wage increases or rising raw material prices are common causes of this type of inflation. The sharp rise in the price of imported oil during the s provides a typical example of cost-push inflation illustrated in Chart 2. Rising energy prices caused the cost of producing and transporting goods to rise.
Higher production costs led to a decrease in aggregate supply from S0 to S1 and an increase in the overall price level because the equilibrium point moved from point Z to point Y. While the differences in inflation noted above may seem simple, the cause of price level changes observed in the real economy are often much more complex. In a dynamic economy it can be especially difficult to isolate a single cause of a change in the price level.
However, knowing what inflation is and what conditions might cause it is a great start! Parry, Robert T. Lansing, Kevin J.
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