Demand-Pull Inflation: Definition & Causes

Table of Сontents

  1. What Is Demand-Pull Inflation?
  2. Demand-Pull Inflation vs. Cost-Push Inflation
  3. Causes Of Demand-Pull Inflation
  4. Pros & Cons Of Demand-Pull Inflation
  5. Demand-Pull Inflation Example
  6. Bottom Line

A kind of inflation known as “demand-pull inflation” happens when consumer demand for products and services rises. This kind of inflation is frequently brought on by broad economic expansion, technical advancements, or an increase in the inflation rate. When this happens, it can boost the economy and provide more employment, but it also raises product costs.

What Is Demand-Pull Inflation?

Demand-pull When there is a rise in consumer demand for goods and services, inflation is one sort of inflation that results. Due to a shortage of necessary supply, firms must raise prices in order to satisfy the growing demand. In the past, this has been the main reason for inflation.

Economics’ demand-pull theory, which outlines the impact of an uneven supply and demand overall, explains inflation. In other words, a product’s price increases when demand exceeds supply. This is sometimes referred to as “too many money chasing too few goods” by economists.


Graphic Representation of Demand-Pull Inflation

Stock Market Black Swan Theory

These things define a black swan occurrence in the stock market:

  • Most of the financial event is unpredictible.
  • The financial event affects many people.
  • Investors use a technique known as hindsight bias to make the occurrence seem foreseeable by rationalising it.
  • The black swan incident is typically thought to have a negative effect on the stock market and surprise investors.
  • Investors search for a black swan pattern to aid in the prediction of future occurrences because they utilise hindsight to analyse what transpired in prior black swan incidents. However, a black swan occurrence is difficult to foresee by definition.

Black Swan Event Examples

Investors might learn from black swan events by studying past occurrences. The dotcom boom and the collapse of the housing market are a few of typical instances.

2001 Dotcom Bubble

One well-known instance of a black swan occurrence is the dotcom bubble in 2001. In 2001, there were few online business apps since the internet was still in its infancy. However, technological businesses made significant investments in their future expansion, which led to an increase in their stock values. Prices eventually decreased when businesses started defaulting. In a short period of time, several businesses closed, which caused stock values to fall even further. The recessionary state of the economy had a severe impact on investors.

2008 Housing Market Crash

Prior to 2008, lax mortgage requirements inflated the housing market and finally drove prices to bubble levels as more subprime mortgages were issued. Taking advantage of the market, banks and big investors produced mortgage-backed securities, which encouraged banks to make riskier loans. Following the eventual collapse of the property market, more homeowners started to default on their mortgages, further damaging the market. The entire financial organisation was on the verge of failing.

Predicting Black Swan Events

Black swan occurrences are by nature unexpected. Investors will thus find it challenging to predict the next black swan occurrence. Investors can follow “experts” and pay attention to ideas that discuss probable outlier occurrences that could have disastrous effects, but history has shown that there is little to no confidence in anything that financial “experts” can forecast.

Black Swan Investing Strategies & Risk Management

In his book, Taleb describes how to anticipate black swan events. The management of risks is one key area of concentration. Taleb talks about a tactic known as the “barbell approach.” This approach retains the vast bulk of an investor’s assets in extremely secure investments while shifting a tiny portion into speculative ones. The portfolio’s risky portion shouldn’t make up more than 10% of the whole portfolio.

The rationale behind this strategy is to safeguard the majority of the capital during a market panic while allowing high-risk investments to flourish.

Diversification is a another tactic an investor might use to lessen the impact of a black swan occurrence. When one part of the market does well, other parts of the market typically perform poorly. Having a diverse portfolio allows investors to benefit from the

Bottom Line

Fortunately, black swan episodes are uncommon. But when they do, market prices suffer severe reductions as a result. Investors should construct their portfolios with the worst-case scenario in mind.

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