Cost-Push Inflation

Cost-push inflation means the rise within the general index number caused by the increase in prices of the factors of production, because of the shortage of inputs i.e. labor, stuff, capital, etc. It ends up in the decrease within the supply of outputs which mainly use these inputs. So, the increase in prices of the products emerges from the provision side.

Cost-push inflation is determined by supply-side factors, such as higher wages and higher oil prices. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy. Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating cost-push inflation.

The most common cause of cost-push inflation starts with an increase in the cost of production, which may be expected or unexpected. For example, the cost of raw materials or inventory used in production might increase, leading to higher costs.

There are three kinds of cost-push inflation:

  • Wage-push inflation: When the monopolistic groups of the society like labor union exercise their monopoly power, to enhance their money wages above the competitive level, which cause an increase in the cost of production.
  • Profit-push inflation: When the monopoly power is used by the firms operating in the monopolistic and oligopolistic market to increase their profit margin, leading to a rise in the price of goods and services.
  • Supply shock inflation: A type of inflation arising due to an unexpected fall in the supply of necessary consumer goods or major industrial inputs.

Inflation may be a measure of the speed of price increases in an economy for a basket of selected goods and services. Inflation can erode a consumer’s purchasing power if wages haven’t increased enough or well-kept with inflation. If a company’s production costs rise, the company’s executive management might attempt to pass the extra costs onto consumers by raising the costs for his or her products. If the corporate doesn’t raise prices, while production costs increase, the company’s profits will decrease.

For cost-push inflation to require a place, demand for the affected product must remain constant during the time the assembly cost changes are occurring. To catch up on the increased cost of production, producers raise the worth to the patron to take care of profit levels while keeping pace with expected demand.

Causes of Cost-Push Inflation –

  • Higher Price of Commodities: A rise in the price of oil would lead to higher petrol prices and higher transport costs. All firms would see some rise in costs. As the most important commodity, higher oil prices often lead to cost-push inflation.
  • Imported Inflation: Devaluation will increase the domestic price of imports. Therefore, after the devaluation, we often get an increase in inflation due to the rising cost of imports.
  • Higher Wages: Wages are one of the main costs facing firms. Rising wages will push up prices as firms have to pay higher costs (higher wages may also cause rising demand)
  • Higher Taxes: Higher VAT and Excise duties will increase the prices of goods. This price increase will be a temporary increase.
  • Profit-push inflation: If firms gain increased monopoly power, they are in a position to push up prices to make more profit
  • Higher Food Prices: In western economies, food is a smaller % of overall spending, but in developing countries, it plays a bigger role.

Cost-push inflation may be caused by an increase in oil prices or other raw materials. Imported inflation could occur after depreciation within the rate of exchange which increases the worth of imported goods.

Other events might qualify if they result in higher production costs, like a sudden change in government that affects the country’s ability to take care of its previous output. However, government-induced increases in production costs are more often seen in developing nations.

Government regulations and changes in current laws, although usually anticipated, may cause costs to rise for businesses because they need no thanks to making amends for the increased costs related to them. For instance, the govt. might mandate that healthcare be provided, driving up the value of employees or labor.

 

Information Sources:

  1. economicshelp.org
  2. investopedia.com
  3. keydifferences.com