demand inflation

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Inflation due to excess demand. If resources are not perfectly mobile between different regions and sectors of the economy, demand inflation can occur even if the level of effective demand in the economy as a whole is below the level needed for normal levels of employment. The higher the aggregate level of activity, the larger the proportion of areas and industries which experience excess demand for goods and labour of various sorts, and the more powerful is demand-inflationary pressure. Demand inflation is contrasted with cost inflation, in which price and wage increases are transmitted from one sector to another. These should be regarded as different aspects of an overall inflationary process: demand inflation explains how inflation starts; cost inflation explains why inflation once begun is so difficult to stop.

Subjects: Economics.

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