Ayaan Jindal
March 22, 2026 · 2 min read
When politicians and commentators talk about inflation, they speak as if it were a single, unified thing. In reality, inflation is a family of related but distinct phenomena, and conflating them leads to bad policy and confused public debate.
The Consumer Price Index — the CPI — measures the average change in prices paid by urban consumers for a basket of goods and services. It is a useful summary statistic. It is also a simplification that can mislead.
Demand-Pull Inflation
The classic case. When the economy is running hot — unemployment is low, consumer confidence is high, and spending is strong — demand outstrips the economy's ability to supply goods and services. Prices rise.
This is the type of inflation the Fed is best equipped to address. Raising interest rates cools demand: it makes borrowing more expensive, slows consumer spending, and encourages saving over spending. The economy decelerates, supply and demand rebalance, and inflation comes down.
The cost is real: slower growth, often rising unemployment. But the mechanism works.
Cost-Push Inflation
Quite different, and harder to address with monetary policy alone. Here, the cause is not excessive demand but a shock to supply: an oil embargo, a pandemic disrupting supply chains, a major drought reducing food production.
When the cost of producing goods rises sharply, producers pass those costs on. Prices increase even as demand may be softening. Raising interest rates here still works — dampen demand enough and prices stabilize — but the recession required to achieve that may be deeper than the alternative.
This is why economists paid close attention during 2021-2022 inflation: how much was demand-driven (stimulus checks, pent-up spending) and how much was supply-driven (chip shortages, shipping disruptions, energy shocks)? The answer mattered enormously for how the Fed should respond.
Expectations and Momentum
Perhaps the least appreciated driver of inflation is expectations themselves. If workers expect 5% inflation next year, they will negotiate for 5% wage increases. If businesses expect their input costs to rise 5%, they will raise prices today to protect margins.
These expectations can be self-fulfilling. Inflation that began as a supply shock can persist long after the original shock has faded, simply because enough people expect it to.
This is why central bank credibility is so valuable and so carefully guarded. A Fed that convinces markets it will bring inflation down can achieve that result with less economic pain than a Fed whose commitments are doubted. Expectations do a lot of the work.
Why This Matters for Policy
A government facing demand-pull inflation has a different toolkit than one facing cost-push inflation. Monetary policy is your main lever for the former. For the latter, supply-side interventions — releasing strategic reserves, easing trade restrictions, investing in capacity — can be more targeted and less costly.
The mistake is treating all inflation as the same thing and reaching for the same hammer every time. Sometimes the problem calls for a different tool.