Definition of demand inflation
What is demand inflation?
Demand inflation is a general and sustained increase in prices due to demand that is too high in relation to supply. The lack of products and services then automatically leads to inflation. The larger the imbalance, the higher the demand inflation. This price increase may occur over several months or years before supply increases to meet demand, thereby stopping inflationary pressures.
The causes of demand inflation
Demand inflation often occurs at the end of a recessionary period, when economic activity begins to recover. Households are then more confident about the future and consume more goods and services. Demand then increases sharply.
On the other hand, when companies emerge from a recession, they are often reluctant to invest and try, above all, to sell their stocks accumulated during the crisis. At first, there is enough supply to meet demand and then, once stocks are exhausted, an imbalance quickly develops between supply and demand. There is then demand inflation.
Demand is always eventually met, but there is a lag time between the time investments resume and the time supply is sufficient to meet demand.
Example of demand inflation
The ‘30 glorious years’ in France (1945-1975) are a perfect example of demand inflation. At the end of the Second World War, households bought more and more goods and services. Demand increased sharply in the years that followed. The problem was that supply was very low, as the productive equipment was largely destroyed during the war. In addition, companies lacked the resources to invest after several years of war. Supply was at its lowest.
Between 1945 and 1960, France therefore experienced high demand inflation. It even reached a peak of 18% in 1957 before quickly falling back below 10%. Inflation was then very volatile.