Read this article to learn about the relation of cost-push inflation with demand-pull or mixed inflation.
Dichotomy in inflation theory; demand-pull and cost-push, is now a part of the language of economics, some economists object to its implication that an inflation is either demand-pull or cost- push.
They argue that any actual inflationary process contains some elements of both. Expressed in this fashion their argument can hardly be denied.
However, if the dichotomy is accepted as nothing more than a convenient two-fold classification of types of causation, their objections do not apply; it is at least helpful in separating two distinct sets of forces that are usually simultaneously and interdependently at work in any actual inflationary process.
In terms of this dichotomy, it should be noted that there is a lack of symmetry between the demand-pull and cost-push theories. An inflationary process may begin with generalized excess demand and may be expected to persist as long as excess demand is present, even though no cost-push forces whatsoever are at work.
Excess demand will raise prices, which in turn will raise wage rates, but the rise in wage rates in this case is not the result of cost-push. We notice, however, that this does not rule out the possibility that cost-push forces may also be at work to produce an even greater rise in wage rates.
On the other hand, an inflationary process may begin on the supply side but it will not long persist unless there is an increase in demand. For example, an autonomous rise in wage rates will raise prices in the absence of any increase in demand. For a cost-push inflation so initiated to be sustained however, one wage increase must be piled on top of another; but in the absence of an increase in demand this would mean ever smaller production and ever greater unemployment. Sooner or later this must limit any inflationary process that depends on changes on the supply side alone. This asymmetry can be illustrated by Fig. 32.10.
With output at Yf, shifts in the aggregate demand function from AD1 to AD2 to AD3 and beyond can carry the price level ever higher, from A to E to G, and so forth, in a sustained inflationary process. With full employment, wage rates will rise along with prices as producers, encouraged to expand output by the enlarged profits that result from the rising aggregated demand, increase their demand for labour. As long as the forces feeding the demand for final output continue to shift the AD function ever higher, inflation will continue unchecked.
In the extreme case, a run-away price level known as ‘hyper-inflation” may result. However, starting again from Yt a wage push or a profit push that shifts the aggregate supply function from AS1 to AS2 will, with the AD function still at AD1, produce an intersection at B and reduce output below the full employment level. A further upward push on the supply side to AS3, unless accompanied by a shift in AD above AD1, will move the intersection to ‘C’ and further reduce output and employment.
The successive reductions in output and the growing unemployment that result under these conditions will bring the inflation to an end. Thus, unlike demand pull, inflation may originate on the supply side but it cannot be sustained unless there is an appropriate increase on the demand side.