What typically causes demand-pull inflation?

Demand-pull inflation occurs when the overall demand for goods and services in an economy surpasses the available supply. This imbalance leads to increased prices as buyers compete for limited goods, creating upward pressure on costs. When consumers and businesses are willing and able to spend more—due to factors such as increased income, lower interest rates, or heightened consumer confidence—demand rises. If production cannot keep pace with this heightened demand, sellers can raise prices, resulting in inflation.

In contrast, the other options address different economic phenomena. Increases in production costs relate to cost-push inflation, which occurs when rising production costs lead to higher prices. Government regulations that restrict competition might affect market dynamics but do not directly create the conditions for demand-pull inflation. Additionally, significant decreases in consumer savings could impact spending behavior but are not a direct cause of demand exceeding supply in the context of demand-pull inflation. The core mechanism behind demand-pull inflation is indeed rooted in the excess of demand over supply.