Demand-pull inflation occurs when aggregate demand (total spending in the economy) rises faster than aggregate supply, typically when the economy is approaching or at full employment. This excess demand forces firms to raise prices as they operate at full capacity, while rising wages boost consumers’ purchasing power, further driving up inflation.
It is often triggered by increases in:
- Consumer spending (C)
- Government spending (G)
- Investment (I)
- Net exports (X – M)
