Using at least one diagram, explain the difference between demand-pull and cost-push inflation.

Inflation is defined as a persistent increase in the average price within a country, in other words a decrease in the purchasing power of a currency. There are two main groups that the reasons for inflation can be grouped in to: demand-pull inflation and cost-push inflation, the principle difference being that in demand-pull it is the demand curve shifting up to cause the price increase, whereas in cost-push, it is the supply curve shifting in.                 Demand-pull inflation (figure A), occurs due to an increase in the demand for goods, allowing producers to charge more for their products. The price mechanism works to find a suitable price level to suit the new, higher demand. This often occurs if the economy grows too fast and over heats, perhaps due to dangerously low interest rates, meaning there is too much money for too few goods. Consumer confidence also encourages people to spend their money. A depreciation of the exchange rate also leads to exports becoming a fresh injection into the circular flow of income. This excess of spending money and demand causes an outwards shift in the demand curve, meaning a new aggregate supply/demand equilibrium is reached at a higher price. In other words, inflation has occurred. 
Cost-push inflation (figure B), on the other hand, occurs when increased costs to the firm forces them to increase their prices and pass on some of these costs to the consumer. This could be due to an increase in wages not offset by an increase in productivity, an increase in interest rates, or perhaps due to an increase in the price of raw materials or rent/transport. Another reason for cost-push inflation can be due to an increase in the price of imports, perhaps due to import taxes, or a weakened currency. All of these reasons force the AS curve to shift leftwards, as the firms attempt to cover their costs, once more forming a new AS/AD price equilibrium at a higher price.