Definition
Demand-pull inflation happens when the total demand for goods and services in an economy grows faster than the economy's ability to produce them. With more spending chasing a limited supply of output, sellers raise prices, and the general price level climbs.
It is often summarized as too much money chasing too few goods. The pressure originates on the demand side of the economy, which distinguishes it from cost-push inflation, where rising production costs are the trigger.
Why it matters
How it works
Demand can surge for many reasons: rising consumer confidence, low interest rates, increased government spending, a fast-growing money supply, or a wave of exports. When the economy is already near full employment, firms cannot easily produce more, so the extra spending bids up prices instead of output. Workers, seeing higher prices, may demand higher wages, which adds further to demand and costs. Because the root cause is excess demand, central banks counter it by tightening monetary conditions, while governments may rein in spending, both of which slow demand back toward what supply can meet.