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Demand pull inflation 
occurs when the economy is buoyant and there is a high aggregate demand, in 
excess of the economy's ability to supply.
(a) 
Because aggregate demand exceeds supply, prices rise.
(b) 
Since supply needs to be raised to meet the higher demand, there will be an increase in demand 
for factors of production, and so factor rewards (wages, interest rates, and so on) will also rise.
(c) 
Since aggregate demand exceeds the output capability of the economy, it should follow that 
demand pull inflation can only exist when unemployment is low. A feature of inflation in the UK 
in the 1970s and early 1980s, however, was high inflation coupled with high unemployment. 
Demand pull inflation: 
inflation resulting from a persistent excess of aggregate demand over aggregate 
supply. Supply reaches a limit on capacity at the full employment level.
5.4.2 Cost push inflation 
Cost push inflation
arises from increases in the costs of production.
Cost push inflation 
occurs where the costs of factors of production rise regardless of whether or not they 
are in short supply. This appears to be particularly the case with wages. 
Cost push inflation: 
inflation resulting from an increase in the costs of production of goods and 
services, eg through escalating prices of imported raw materials or from wage increases.
5.4.3 Import cost factors 
Import cost push inflation 
occurs when the cost of essential imports rise regardless of whether or not 
they are in short supply. This has occurred in the past with the oil price rises of the 1970s. Additionally, 
a fall in the value of a country's currency will have import cost push effects since a weakening currency 
increases the price of imports. 
5.4.4 Expectations and inflation 
A further problem is that once the rate of inflation has begun to increase, a serious danger of