Compare demand pull and cost push inflation and evaluate inflationary pressures facing the property market.

Compare demand pull and cost push inflation and evaluate inflationary pressures facing the property market.

Inflation can be defined as a “persistent and generalized increase in the level of prices”.[1]Its causes can be broadly divided into 2 categories, that is, the demand-pull and the cost push inflation. Demand pull is when there is too much money in the market and fewer goods. Hence the demand for the product with limited supply drives the price up causing inflation. Such a situation usually occurs when the economy is booming and there is more money in circulation as more persons are employed and therefore they have more money to spend. A prosperous economy usually leads to a demand pull type of inflation.

On the other hand, the cost push inflation occurs due to the increase in costs on the production side such that the rise in costs hikes up the prices in turn. The costs can rise due to a number of reasons such as if the cost of the raw material suddenly rises, or if the cost of the labour, i.e. the wages rise, or if the Government levies a new form of tax applicable on the production cost of the product.

Unlike the demand pull inflation, which is dependent on the disposable income and the purchasing power of the people, the cost push inflation occurs from backstage, at the production end due to unavoidable increases in costs. Also that demand pull is likely to be associated with either full employment or rising employment, whereas it is possible that cost-push inflation may be associated with rising unemployment. Demand pull and cost push can both happen at the same time in an economy. Demand pull can cause cost push to happen and vice versa.[2]

Inflationary pressures are high when the economy is strong and they are relatively weaker as the economies spiral downwards. Demand and cost push theories point out that the closer the economy is to full employment, the greater the inflationary pressure whereas the greater the rate of unemployment, the lesser the inflationary pressure.[3]

Since the beginning of the 2000’s, the real estate investment contributed to one of the largest factors of propelling the economy towards growth. A large amount of investment went towards the property market as more and more people found employment and the average income level increased. Since people had more dispensable income, they chose to invest in property.

 In the current scenario of recession hitting the world, unemployment is at record high levels and therefore, there is lesser money in circulation. This causes the abundance in supply in the property market as the buyers dwindle and the numbers of properties remain the same. As a result, the prices in the property market have fallen. Therefore, the inflationary pressures facing the property market at the moment are easing. This is a reverse act of the demand pull inflationary process where the drop in demand actually causes a drop in the property prices.

[1] Ian Hobday(1999)Economics, Great Britain, Hodder & Stoughton Educational,Pg.205
[2] Varian (1992)Microeconomic Analysis ,W.W. Norton
[3] R. Preston McAfee(2006) Introduction to Economic Analysis, California, California Institute of Technology