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What is Cost Push Inflation?

2016-11-18T11:34:45+00:00

The term 'Cost Push Inflation' is included in the Economics edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

Cost-push inflation is a scenario where all around price levels go up, creating inflation. This happens because of rising prices in the important inputs of raw materials as well as higher wages for labor. This type of inflation appears because of rising production factors costs. This leads to a lower amount of total supply and production in the economy. With a smaller quantity of good being produced as the supply weakens while demand for such goods remains constant, the final cost for the finished products goes higher. This creates the inflation.

Cost-push inflation most typically begins when the costs of production rise. This is many times an unexpected cost increase. It could come as a result of higher prices in input raw materials, an unforeseen shutdown of or damage to a key production facility (like with natural disasters or fire), or forced higher wages for the employees in production. The higher wages could result from an increase in the minimum wage that automatically boosts the salaries of the workers who were making less than the new legally accepted minimum standard.

In order for such cost-push inflation to occur, the associated demand of the product in question has to stay constant while the changes in costs of production are actually happening. Producers then feel they have no choice but to compensate for the rising production expenses. They raise their end prices for their consumers so that they can hold their profit margins as they attempt to keep up production with anticipated demand for the products.

There can be several unanticipated causes of this cost-push inflation. Natural disasters are a common example. There might be earthquakes, floods, tornadoes, hurricanes, or other kinds of large “acts of God” events that interfere with some component in the production chain. These create higher costs of production. Natural disasters that do not lead to higher costs of production do not qualify as an example of this type of inflation.

There are other actions that can eventually cause rising costs of production as well. It might be a strike of the plant workers that happens because of failed negotiations in contracts. It could also result from a rapid change in government as often happens in developing countries. This might create an inability for the country to keep up its prior levels of production output.

There are similarly cost-push inflation causes that may be anticipated but are still unavoidable. Present regulations and laws can change. These changes may be foreseen. Despite this, there could still be no practical means of offsetting the resulting higher costs that come along with the changes.

Cost-push inflation is one of the two main types of inflation. The other kind is demand-pull inflation. This is the opposite form. In demand-pull, higher production costs force up the price of an individual service or good. With demand-pull inflation, the increase in demand happens even when production may not be boosted to cover the rising needs. In such cases, the costs of the product will go up because of the resulting imbalance that is created in the natural demand and supply model.

The term 'Cost Push Inflation' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.