Economists distinguish between two kinds of inflation: “demand-pull” and “cost-push”. Demand-pull inflation is said to occur when there is excess demand in a situation where supply cannot be augmented, because full capacity output has been reached in one or more crucial sectors. War-time inflation is a classic example. In India during the pre-neoliberal, dirigiste period, inflation was often the result of insufficient foodgrain output relative to demand, arising from a poor harvest.
Cost-push inflation on the other hand occurs when supplies can be augmented, as the economy is nowhere near full capacity in key sectors, but one of the classes tries to raise its share of output, by demanding a higher price for the input it provides, while other classes are unwilling to lower their shares, giving rise to a tug-of-war, which manifests itself through inflation.Read More »