Cost-Push Inflation - Explained
What is Cost-Push Inflation?
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Table of ContentsWhat is Cost-Push Inflation?What causes Cost-Push Inflation?Unexpected Causes of Cost-Push InflationExpected Causes of Cost-Push InflationCost-Push vs. Demand-PullExample of Cost-Push InflationAcademic Research on Cost-Push Inflation
What is Cost-Push Inflation?
Cost-push inflation occurs when the total price level of goods rises as a result of an increase in wages and raw materials used in production. When there is a consistent demand for goods and there is a lower supply of these goods, then the prices of these goods rise. This is referred to as inflation. Cost-push inflation is a result of the decrease in the amount of production as a result of an increased cost of raw materials used for production.
What causes Cost-Push Inflation?
Certain factors may cause an increase in the cost of production, these factors include an increase in the cost of materials used for production, production facility breakdown, and increased minimum wage. An increase in the cost of production is one of the main causes of cost-push inflation Cost-push inflation occurs when the demand for a product remains constant but there is an increase in the cost of resources to produce such products, this then results in the producer inflating the price so as to be able to make profits while being able to satisfy the demand.
Unexpected Causes of Cost-Push Inflation
Activities that lead to a high production cost are natural disasters like tornadoes, earthquakes, and others, workers strike, government policies and change in government. The above factors may affect production costs causing its to increase. Also note that not all natural disasters cause an increase in production cost, the increase is dependent on how the production chain is affected.
Expected Causes of Cost-Push Inflation
Adjusting rules and regulations governing production may be expected but there is no justification for cost increase that accompanies them, unlike the change in government which may not be expected to result in cost-push inflation.
Cost-Push vs. Demand-Pull
Contrast to the cost-push inflation is the demand-pull inflation. Demand-pull inflation features the production remaining constant even when there is an increased demand. As a result of this constant supply which is not able to cover up for the demand, prices of products are inflated.
Example of Cost-Push Inflation
Organization of Petroleum Exporting Countries members created cost-push inflation during the 1970s. OPEC wanted to be the sole seller of petrol by limiting the general supply with a hike in the price. This event suddenly caused a drastic increase in the price of petrol (supply shock) as there was no increase in demand.