Demand-pull inflation takes place when there is full employment of resources and when short-run aggregate supply (SRAS) is inelastic. In a market with these conditions, an increase in AD leads to an increase in prices. The increase in AD can be caused by various factors: strong economic growth in overseas countries, prompting a demand for exports; money supply growth as a result of banks borrowing if interest rates are low; depreciating exchange rates leading to an increased price of imports and decreased price of American exports; and lower taxes, which allow consumers to have more disposable income, causing an increase in demand.
Cost-push inflation is the result of businesses reacting to increasing production costs by raising their prices in order to retain profit margins. This can result from increasing labor costs caused by wage increases that are greater than any improvement in productivity; an increase in the cost of importing raw materials, caused by inflation in countries that are reliant on certain commodities or by a reduction in the value of currency against the country from which the import is coming; or higher indirect taxes on producers (cigarettes and alcohol, for example) that are passed on to consumers.
William Phillips developed the Phillips Curve, which suggests a relationship between unemployment and inflation. His findings suggest that there is a trade-off between unemployment and inflation, meaning any government efforts to reduce unemployment would lead to increased inflation.
Research suggests that people are easily influenced by the media and a perceived belief that inflation will happen in the short term. If inflation is expected (or the public believes it will happen), people ask employers for additional pay to ensure they get a real wage increase; this subsequently increases businesses' costs and can lead to inflation.