Demand-pull inflation
Demand-pull inflation arises when aggregate demand grows strongly relative to the economy’s capacity to supply goods and services. With limited spare capacity, firms may respond increasingly through higher prices rather than additional real output. The pressure can come from consumption, investment, government spending or net exports. A rise in demand does not necessarily cause substantial inflation if sufficient unused capacity can respond.
Worked example
Household spending and business investment rise quickly while factories already operate near capacity. Firms face more orders than they can readily fulfil and raise prices. The demand pressure helps explain the broad price increase.
Common mistake
Do not define this as demand for one product exceeding its stock. The inflation concept concerns aggregate price pressures, and demand and supply influences can operate together.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | BT | Direct | September 2026–June 2027 |
| FIA | FBT | Direct | September 2026–June 2027 |