Demand Pull Inflation? What?

Consumer Price Inflation, much like what has stated in MHL’s CPI report the other day – This would explain to you the very basics of Demand Pull Inflation.

Related Content: Consumer Price Index Malaysia 2008

Supply and Demand. That’s the basic thing about demand pull inflation. When demand for certain goods or services goes beyond supply, it’ll cause a rising inflation, as the GDP (Gross Domestic Product) rises and employment rates fall below the standard ‘tallying’ limit.

However, this is a great time for business. There is so much business to do, so much money to make but so little supply (or maybe too few). It really depends on you finding that niche item.

So what are the factors affecting demand pull inflation? Let’s take a look.

  1. Growth of money supply (Quick and Steady)
    Interest rates are low, banks are borrowing more money for growth, tourism dollars are increasing, etc. Usually hovers on the issue of monetary supply exceeding volume of transactions needed by a particular economy.
  2. Reduction in direct and indirect taxation.
    Taxes are reduced, people would have more disposable income.
  3. Depreciation in exchange rate.
    Great example from the import/export element. When people buy less MG Rover and more Proton Saga, the aggregate demand (AD) will increase.
  4. Market maturity and increased rate of base prices.
    When a particular market matures, it explores more into something new. As it popularize and grow, base prices will be at peak, and slower prices later. But this has created a new demand and ‘bubble’ for that particular industry.
  5. Boost of economy in neighboring countries.

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