Inflation Theories - Demand-Pull Inflation - Demanding inflation

One of the principal causes of inflation is excessive demand - 'too much money chasing too few goods'. If demand is growing faster than the level of supply, then prices will increase. Output will increase as well, as there is a shift along the aggregate supply curve, but because supply cannot keep up with demand prices go up as well. This is shown in the diagram below:

Demand-pull inflation will therefore usually occur along with a booming economy. To avoid demand-pull inflation you need to try to keep the economy growing at a steady, but not excessive rate - a tall order!