Cost-Push Inflation:-

• When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation.
• Cost-push inflation means prices have been “pushed up” by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity.
• With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).
• If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services.
  1. To maintain or increase profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher.
  2. Along with increasing sales, increasing prices is a way for companies to increase their bottom linesand grow.
• Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcityof raw materials, an increase in the cost of labor to produce the raw materials, or an increase in the cost of importing raw materials. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes.

Demand-Pull Inflation

• Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments and foreign buyers.
• When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers, in essence, “bid prices up” again, causing inflation. This excessive demand, also referred to as “too much money chasing too few goods,” usually occurs in an expanding economy.
• The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics.
  1. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices.
  2. Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand
  3. Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners.
  4. Finally, if a government reduces taxes, households are left with more disposable income in their pockets. This, in turn, leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation.
  5. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand.

Differences:-

• The demand-pull inflation is when the aggregate demand is more than the aggregate supply in an economy, whereas cost push inflation is when the aggregate demand is same and the fall in aggregate supply due to external factors will result in increased price level. 
• Demand-pull inflation arises when the aggregate demand increases at a faster rate than aggregate supply. Cost-Push Inflation is a result of an increase in the price of inputs due to the shortage of cost of production, leading to decrease in the supply of outputs.
• Demand-pull inflation describes, how price inflation begins. On the other hand, cost-push inflation explains Why inflation is so difficult to stop, once started.
• The reason for demand-pull inflation is the increase in money supply, government spending and foreign exchange rates. Conversely, cost-push inflation is mainly caused by the monopolistic groups of the society.
• The policy recommendation on demand-pull inflation is associated with the monetary and fiscal measure which amounts to the high level of unemployment. Unlike, cost push inflation, where policy recommendation is related to administrative control on price rise and income policy, whose objective is to control inflation without increasing unemployment.

Inflation is good/bad for the economy:-

• Inflation is a relative concept, the utility of which varies from economy to economy. It is good for some economies whereas it is bad for some.
• Lower inflation means lower aggregate demand in an economy. Due to lower demand in these developed economies, they are not witnessing growth. Hence they are targeting for higher inflation.
• Under normal circumstances, ‘moderate’ inflation is good for any economy. Since inflation simply means Demand is greater than Supply, which means the overall consumption in an economy is rising.
• Rise in demand will cause increase in production. Because of which profits of companies would increase (more sales=more profits). When companies would earn more profits, there will also be hike in wages of workers as incentive. Hence standard of living of workers will improve. Which ultimately means the economy is prospering.
• However, extreme situations are detrimental for any economy. Neither excessive inflation is good nor deflation (fall in prices) is good.
  1. When there is excessive inflation, which means that goods are getting very expensive, this will reduce aggregate demand for products in the economy. This will cause fall in profits of companies (or even losses). Because of which there might be reduction in wages of workers or even lay offs. Which will cause the economy to shrink.
  2. On the other hand, deflation has similar effect. Deflation looks good from consumers point of view. However, that is not so. There is deflation in an economy when Supply is greater than Demand. Because of lack of demand, companies will not produce goods, which will cause fall in wages & ultimately reduction in aggregate demand (since purchasing power of people will fall because of fall in wages). This again causes shrinking of economy.
• So, to conclude, every economy strives to achieve ‘moderate’ inflation. Inflation might be good or bad depending on economic scenario of that country.