What is Cost-Push Inflation?

In this updated revision video we look at the key causes of cost-push inflation and focus on unit labour costs and exchange rates.

Cost-push inflation is a type of inflation that occurs when the costs of production for goods and services increase, leading to higher prices. It is driven by supply-side factors rather than changes in aggregate demand.

In cost-push inflation, the increased production costs are passed on to consumers through higher prices. This can happen due to several factors:

1. Increase in Input Costs: When the prices of raw materials, labor, energy, or other inputs used in production rise, it leads to higher production costs for businesses. These increased costs can be a result of factors such as rising commodity prices, wage increases, or higher taxes and regulations.
2. Higher Wage Demands: When workers demand and negotiate higher wages, businesses may respond by increasing prices to maintain their profit margins. Higher labor costs can be driven by factors such as strong labor unions, minimum wage increases, or labor shortages.
3. Government Regulations: The introduction or tightening of government regulations can increase compliance costs for businesses. This can include environmental regulations, safety standards, or other regulatory requirements. The added costs can be passed on to consumers through higher prices.
4. Supply Disruptions: Natural disasters, geopolitical events, trade restrictions, or other supply-side shocks can disrupt the supply chain and lead to shortages of key inputs. Reduced availability of inputs can increase production costs and result in higher prices for consumers.

Cost-push inflation is generally considered unfavorable as it can erode purchasing power and reduce consumers' real income. It can also create challenges for businesses, as they may face higher costs and reduced profit margins. Central banks may respond to cost-push inflation by implementing monetary policies aimed at controlling inflationary pressures and supporting economic stability.

It's important to note that cost-push inflation can also interact with demand-pull inflation. For example, if an increase in production costs leads to higher prices, it can reduce consumers' purchasing power and dampen aggregate demand, potentially impacting the overall inflationary dynamics in an economy.