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DEFINITION of 'Demand-Pull Inflation'. A term used in Keynesian economics to describe the scenario that occurs when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase. Economists will often say that demand-pull inflation is a result of too many dollars chasing too few goods.
Five circumstances lead to demand-pull inflation. A growing economy creates inflation as people are confident and spend more. That further benefits economic growth by creating an expectation of inflation. That motivates them to buy more now to avoid further price increases. The Federal Reserve sets an inflation target to manage the public's expectation of inflation. It's at 2 percent as measured by the core inflation rate. The core rate removes the effect of seasonal food and energy increases. Discretionary fiscal policy contributes to demand-pull inflation.