Cost-Push Inflation

What Is Cost-Push Inflation?

Cost-push inflation (otherwise called wage-push inflation) happens when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Higher costs of production can diminish 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 gone to consumers making cost-push inflation.

Cost-push inflation can measure up to demand-pull inflation.

Grasping Cost-Push Inflation

Inflation is a measure of the rate of price increases in an economy for a basket of chosen goods and services. Inflation can disintegrate a consumer's purchasing power on the off chance that wages haven't sufficiently increased or stayed aware of rising prices. In the event that a company's production costs rise, the company's executive management could try to pass the extra costs onto consumers by raising the prices for their products. In the event that the company doesn't raise prices, while production costs increase, the company's profits will diminish.

The most common reason for cost-push inflation begins with an increase in the cost of production, which might be expected or unexpected. For instance, the cost of raw materials or inventory utilized in production could increase, leading to higher costs.

For cost-push inflation to happen, demand for the impacted product must stay consistent during the time the production cost changes are happening. To make up for the increased cost of production, producers raise the price to the consumer to keep up with profit levels while keeping pace with expected demand.

Reasons for Cost-Push Inflation

As stated before, an increase in the cost of info goods utilized in manufacturing, like raw materials. For instance, assuming that companies use copper in the manufacturing system and the price of the metal suddenly rises, companies could give those increased costs to their customers.

Increased labor costs can make cost-push inflation, for example, when mandatory wage increases for production employees due to an increase in the lowest pay permitted by law per worker. A worker strike due to stalled contract talks could likewise lead to a decline in production; and subsequently, lead to higher prices.

Unexpected reasons for cost-push inflation are in many cases natural disasters, which can incorporate floods, tremors, fires, or cyclones. In the event that a large disaster makes unexpected damage a production facility and results in a shutdown or partial disruption of the production chain, higher production costs are probably going to follow. A company could have no real option except to increase prices to assist with recovering a portion of the losses from a disaster. Albeit not all natural disasters bring about higher production costs and consequently, wouldn't lead to cost-push inflation.

Different events could qualify in the event that they lead to higher production costs, for example, a sudden change in government that influences the country's ability to keep up with its previous output. In any case, government-actuated increases in production costs are all the more frequently found in non-industrial countries.

Government regulations and changes in current laws, albeit typically anticipated, may make costs rise for organizations since they have no real way to make up for the increased costs associated with them. For instance, the government could command that healthcare be given, driving up the cost of employees or labor.

Cost-Push versus Demand-Pull

Rising prices brought about by consumers needing more goods is called demand-pull inflation. Demand-pull inflation remembers times when an increase for demand is perfect to such an extent that production can't keep up, which ordinarily brings about higher prices. In short, cost-push inflation is driven by supply costs while demand-pull inflation is driven by consumer demand — while both lead to higher prices went to consumers.

Illustration of Cost-Push Inflation

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel that comprises of 13 member countries that both produce and export oil. In the mid 1970s, due to international events, OPEC forced an oil embargo on the United States and different countries. OPEC prohibited oil exports to targeted countries and furthermore forced oil production cuts.

What followed was a supply shock and a quadrupling of the price of oil from roughly $3 to $12 per barrel. Cost-push inflation resulted since there was no increase in demand for the commodity. The impact of the supply cut prompted a flood in gas prices as well as higher production costs for companies that pre-owned petroleum products.

Highlights

• Since the demand for goods hasn't changed, the price increases from production are gone to consumers making cost-push inflation.
• Cost-push inflation happens when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
• Cost-push inflation can happen when higher costs of production decline the aggregate supply (the amount of total production) in the economy.

FAQ

Is Inflation Always Bad?

In theory, a low amount of inflation can be a solid indication of a developing economy. High inflation, nonetheless, can be harming (yet deflation, or declining prices, can be too). Note that inflation isn't generally awful for certain gatherings. For instance, borrowers at fixed interest rates will quite often benefit from inflation while lenders and savers are wounded by it.

What Causes Inflation?

Inflation, or a general rise in prices, is remembered to happen in light of multiple factors, and the specific reasons are as yet bantered by financial specialists. Monetarist speculations propose that the money supply is the root of inflation, where more money in an economy leads to higher prices. Cost-push inflation speculates that as costs to producers increase from things like rising wages, these higher costs are given to consumers. Demand-pull inflation takes the position that prices rise when aggregate demand surpasses the supply of accessible goods for supported periods of time.

What Is the Wage-Price Spiral?

The wage-price spiral is an interpretation of cost-push inflation contends that as wages rise, it encourages more interest, which leads to higher prices. These higher prices in this way boost workers to demand even higher wages, thus the cycle rehashes.