Introduction to Finance

cost-push infl ation 
occurs when 
prices are raised to cover rising 
production costs, such as wages
demand-pull infl ation 
occurs 
when an excessive demand for 
goods and services is created during 
periods of economic expansion as 
a result of large increases in the 
money supply 

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8.5 Inflation Premiums and Price Movements
211
similar increases in other industries and among the nonorganized workers in such industries. 
The process, once set into motion, can lead to general changes in prices, provided the monet-
ary authorities do not restrict credit so as to prevent it.
Infl ation associated with increases in the money supply also can occur because of monet-
ization of the U.S. government debt. Recall from Chapter 5 that the Treasury fi nances govern-
ment defi cits by selling U.S. government securities to the public, fi nancial institutions, foreign 
and international investors, and the Federal Reserve. When the Federal Reserve purchases 
U.S. government securities, reserves must be created to pay for the purchases. This, in turn, 
may lead to higher infl ation because of an increase in money supply and bank reserves.
Speculation and Administrative Inflation 
When an increased money supply 
causes infl ation, it can lead to the additional price pressure called 
speculative infl ation
. Since 
prices have risen for some time, people believe that they will keep on rising. Infl ation becomes 
self-generating for a time because, instead of higher prices resulting in lower demand, people 
may buy more to get goods before their prices go still higher, as happened in the late 1970s. 
This eff ect may be confi ned to certain areas, as it was to land prices in the 1920s Florida land 
boom, or to security prices in the 1928–1929 stock market boom. Such a price rise leads to an 
increase in velocity as speculators try to turn over their funds as rapidly as possible, and many 
others try to buy ahead of needs before there are further price rises.
For three decades, until the early 1980s, price pressures and infl ation were continual 
despite occasional policies of strict credit restraint. During this long period, in fact, prices 
continued upward in recession periods, though at a slower rate than in prosperity periods. The 
need to restrain price rises hampered the Fed’s ability to promote growth and fi ght recessions. 
Prices and other economic developments during this period led many to feel that the economy 
had developed a long-run 
infl ationary bias
. However, the continued low infl ation rates from 
the early 1990s to the present seem to have curtailed these beliefs.