Now we turn to discuss whether inflation is the result of upward pull of demand or upward push of costs on prices.
This means that there is a distinction between these two kinds of inflation. DPI is associated with full employment whereas CPI is associated with unemployment.
Such distinction becomes prominent when policy measures are recommended for action. For DPI, often monetary policy and fiscal policy measures are recommended while, for CPI, certain non-monetary and non- fiscal measures are recommended. So our task is to distinguish between these two varieties of inflation.
The distinction between DPI and CPI is purely theoretical; but it is difficult in practice to distinguish between these two types of inflation. DPI occurs when there exists excess demand in the product market. Thus, price level rises first leading to a rise in wages. In the case of CPI, this casual sequence is reversed—wages rise first and after this the price level.
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In practice, it is difficult to distinguish whether price level rises first or cost, i.e., wages. In reality, we find both price level and wage rates to rise simultaneously. Under the circumstances, it is not possible to identify whether inflation is of demand-pull variety or cost-push variety.
Secondly, DPI arises at the full employment situation. But CPI may emerge even if the economy stays below the full employment situation. Hence the distinction. But we should say that CPI may come out even in a situation of full employment. In that case, the distinction between the two cannot be made.
Thirdly, we know that, in a modern economy, wage determination is mostly an administrative decision. Further, prices of most commodities are also administered prices. Thus, prices are not determinded by market forces. Under the circumstance, it is not possible to distinguish between DPI and CPI.
Finally, it is almost impossible ‘to devise a test capable of determining whether a particular inflation is of the demand-pull or cost-push variety’. No empirical study has been made in this direction. In fact, the distinction between DPI and CPI is unworkable. That is why one author has remarked that the issue of DPI vs CPI is ‘largely a spurious one’.