Violations of Macro Constraints and Inflation: Different Types of Demand-pull and Cost-push Inflations, with Indian Illustrations

Economic decision-makers are micro units like individuals, firms, financial institutions, various state agencies, etc. It is only a rare chance that the aggregate effect of their economic actions will conform with the macro constraints facing the economy. When they do not, the economy tries to adjust through disequilibrium, and the effects of various micro actions turn out to be different from what were intended. The final results are such that the macro constraints are satisfied, though the effects on various parts of the economy may be far from desirable ones. These are mainly influenced by price and employment changes. Price inflation makes for differences in nominal and real wage rates, and thus controls the demands of the wage earners. Differential price increases of different commodities also serve to deflect demand from the commodities using comparatively larger quantities of the factor constraining at the macro level.