The evils of inflation

Not so very long ago, I learned that demand-pull inflation was the result of the aggregate demand of an economy rising. At least according to Keynesian theory. With the many parts of world now experiencing inflation, it is a good time now to see if its a demand-pull inflation or a cost push inflation.

According to the definition of demand pull inflation, if there is a general rise in demand of all the goods in an economy. Now how can that be? Usually, given a fixed income, if you demand more of one good, you need to give some of other goods. So the only case where this is violated is when everybody, at least on average, has higher income than before. Higher average income?? That implies that there should be more money circulating in the economy? Consider the case of a 'mini economy' of 2 persons, A and B. A has $2 in his hands, B has none. B just made some nice clay pots that A likes. A pays B $1 to buy 1 pot. B notices that A has some excess food that he needs. B pays A $1 to buy some food. Lets say one day, A suddenly fancies B's pots more, and gets 2 pots. To B, B's income has just risen. B goes to A to splurge his money and bought more food. But notice that throughout this whole exchange, even total demand of goods has risen(now A buys $2 worth of pots, and B buys $2 worth of food), there is no way inflation can be occurring here. If B raises the price of his pots, A will have to cut back buying of pots. We can generalise this case further to an economy with more people and more goods in it, and notice that if quantity of money does not increase, its hard to see how a rise in demand of all goods can lead to general price level rising. Money supply must be rising for demand pull inflation to occur. Also an inflation in one country and spread to another, since currencies of different countries is interchangeable to buy goods of different countries.

Cost push inflation is another thing, and that's for future post to say.