The lesson
Explain the mechanism, then qualify the outcome. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
Two routes to higher prices
Inflation can emerge when aggregate demand grows faster than productive capacity or when firms face higher costs.
- Demand-pull inflation can occur when consumption, investment, government spending or net exports push AD beyond available capacity.
- Cost-push inflation can follow higher wage, energy, tax or imported-input costs.
- An exchange-rate depreciation can make imported inputs and consumer goods more expensive, creating cost pressure.
Effects and policy choices
The impact of inflation depends on whether it is anticipated, stable and shared evenly across households and firms.
- Unexpected inflation can redistribute income between borrowers, lenders, workers and firms.
- Higher interest rates can reduce demand-pull inflation but may slow growth and raise unemployment.
- Supply-side measures can help with capacity and costs but often work slowly.
Worked exam thinking
Worked example: rising fuel costs
Prompt: How can a sharp rise in global oil prices affect domestic inflation?
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1Define the core idea precisely.
- 2Explain the chain of cause and effect.
- 3Apply it to the context in the question.
- 4Evaluate a limitation, trade-off or condition.
Quick questions
Check your understanding
What is demand-pull inflation?
Inflation caused by aggregate demand rising faster than the economy’s ability to produce output.
What is cost-push inflation?
Inflation caused by rising production costs, such as energy, wages or imported materials.
Does every price rise mean inflation?
No. Inflation refers to a sustained increase in the general price level, not a one-off change in a single product price.