What characterizes demand-pull inflation?

Demand-pull inflation is characterized by high consumer spending leading to price increases. This phenomenon occurs when the overall demand for goods and services in an economy outpaces the available supply. When consumers have a higher appetite for products—often due to factors such as increased wages, consumer confidence, or government spending—businesses may struggle to keep up with this demand. As a result, they raise prices, which contributes to inflation.

The core of demand-pull inflation lies in its relationship with demand: when consumers are eager to buy more than what is available, the pressure on prices increases. This inflationary pressure can manifest in various ways, including rising prices for goods and services across the board, not just a few areas of the economy.

In contrast, elements like supply exceeding demand, increased production costs, or stagnant economic activity describe different scenarios that do not align with the mechanism of demand-pull inflation. For instance, if supply exceeds demand, it typically leads to deflationary pressure instead of inflation. Increased production costs might cause cost-push inflation where the focus is on rising prices due to higher costs of inputs. Stagnant economic activity reflects a lack of growth or demand rather than excessive demand, which is contrary to the essence of demand-pull inflation