When global policies, war, or natural disasters drastically reduce the oil supply, gasoline prices rise because demand remains relatively stable even as supply shrinks. Additionally, the recent shutdown of a natural gas pipeline due to cyber-theft trimmed the supply of natural gas, driving up prices despite steady weather-driven demand.
Hurricanes or floods are often the causes of cost-push inflation when they lead to the shutdown of certain refineries. Demand usually remains the same, but the refineries available to produce gasoline usually have to jack up prices because they don’t have enough crude oil supply to turn into fuel.
What is Demand-Pull Inflation?Demand-pull inflation is the tendency for prices to increase due to increasing aggregate demand, or the amount of goods and services the entire population buys. This type of inflation is usually associated with a strong economy.
As an economy strengthens, employment tends to rise. As more people go back to work, they make more money and they spend more money. However, if goods are limited at a time when people are willing to spend more money, competition among consumers drives prices up. Economists often refer to this type of inflation as “too many dollars chasing too few goods.”
Demand-pull inflation is not limited to the consumer sector of the economy. We get a similar outcome if the government puts more money into circulation, or if a low interest rate environment encourages too much borrowing.
Examples of Demand-Pull InflationIn March of 2023, the global economy shut down due to the coronavirus pandemic. With the advent of a number of vaccines in late 2023, the global economy began to slowly open up. As the availability of vaccines increased, the pace of vaccinations rose sharply and the global economic recovery moved forward at a rapid speed.
The global economic recovery is driving up demand for goods and services that weren’t readily available for close to a year. Inventories have been depleted as consumers demand more food, household items, and fuel. This increased demand is “pulling” up prices.
Employment is rising also which means consumers have more disposable income. Gasoline demand and prices are rising as more employees drive to work. Airline tickets and hotel rooms are also rising as pent-up consumers increase travel.
The current low-interest-rate environment is keeping a lid on mortgage rates, which is encouraging consumers to buy more houses, but with the supply of homes limited, prices are skyrocketing. Some are buying new homes which have driven up the prices of lumber and copper to near-record levels.
Essentially, as the global economy opens up, individuals want to spend money, but factories haven’t been able to meet demand as quickly. Consumers are willing to pay higher prices, thereby, creating demand pull-inflation.