There really can be too much of a good thing when it comes to economic growth, and the concept of demand-pull inflation bears that out. Demand-pull inflation explains why certain items or services rise in price even when they appear to be in plentiful supply. A booming economy means that factories are hiring more workers and those workers are producing more products. However, these additional employees are also earning more money and want to spend that money on products they may not have able to afford while unemployed or underemployed. Because the demand for these products rises but the supply cannot be increased fast enough to meet it, the price of the products often rises. This price rise during seemingly strong economic times is called demand-pull inflation by those who ascribe to the Keynesian economics model.
Demand-pull inflation is often described by many sources as "too much money chasing too few goods," which is a very apt description of the situation. When unemployment rates are low, which is usually seen as a positive step for a nation's economy, the number of people earning money increases. These workers are often responsible for producing consumer goods in high demand, such as popular toys or electronic devices or processed foods. Ironically, the workers who struggle to meet demand for their own products are also consumers who create higher demands for other goods and services. Even though the supply of a product may be as high as ever, the increased demand for it by a larger pool of workers creates demand-pull inflation.
Fortunately for consumers, the effects of demand-pull inflation are generally short-term. Once demand for a popular toy dies down after a holiday season, for example, the company has time to replenish the supply and the price for that toy generally comes down. If the unemployment rate should rise, then demand for a product may fall because fewer consumers can now afford to buy it. During times of demand-pull inflation, aggregate supply is rarely low, just unable to keep pace with aggregate demand caused by more spending by employed workers.
Demand-pull inflation is often seen as the flip side of cost-pull inflation, which creates higher prices because of an increase in the cost of raw materials or labor. Since the production costs of the goods are not generally a factor in demand-pull inflation, the economy usually adjusts quickly after the spike in consumer demand has ended. The conditions which cause cost-pull inflation, on the other hand, may last for months or even years if the labor or material issues are not addressed successfully. Demand-pull inflation is a problem many of the world's economies wouldn't mind experiencing, since it only occurs when the gross national product (GNP) is rising and the employment rate is falling.
