Demand-Pull vs Cost-Push Inflation
Demand-pull inflation comes from spending outrunning the economy’s capacity, while cost-push inflation comes from rising production costs (like an oil shock); the difference matters because cost-push raises inflation and unemployment together, which demand management cannot fix cleanly.
Demand-pull
Demand-pull inflation is the classic "too much money chasing too few goods." Strong stimulus, low rates, or a spending boom push demand past what the economy can produce, and prices rise to ration the shortfall. It tends to come with low unemployment, because the economy is running hot.
Cost-push
Cost-push inflation comes from the supply side: energy spikes, supply-chain breakdowns, crop failures. Production gets more expensive, so firms raise prices while also producing less. That means inflation and unemployment rise together, the stagflation problem.
Why the distinction matters
For demand-pull, raising interest rates works cleanly: cool demand, cool inflation. For cost-push, the central bank faces a genuine dilemma, because tightening enough to offset the price shock deepens the downturn. The honest answer is that the response depends on whether expectations stay anchored. The post-Covid inflation was a live debate about exactly how much was supply vs demand.
The simulator lets you fire a pure "supply shock" or a pure "demand shock" separately and watch the different signatures in inflation and unemployment.