Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level.
Cost push inflation occurs when we experience rising prices due to higher
costs of production and higher costs of raw materials. Cost push inflation is
determined by supply side factors (cost-push inflation is different to
demand-pull inflation which occurs due to aggregate demand growing faster than
aggregate supply)
Cost-push inflation can lead to lower economic growth and often causes a
fall in living standards, though it often proves to be temporary.
Cost-push inflation is when
a shortage of supply of labor, raw materials or capital drives
up prices. The demand
remains the same, but since there are fewer goods or services, the supplier can
charge more per unit. It is one of the three main causes of inflation, the
other two being demand-pull
inflation and expansion of the money supply. Cost-push
inflation can only occur if demand for the end product or service is inelastic.
That means there is a high demand for the product even if the price goes up.
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 (e.g. 1970s, 2008, 2010-11)
- Imported
Inflation. A devaluation will increase the domestic price of imports.
Therefore, after a devaluation we often get an increase in inflation due
to 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.
- Higher
Food Prices. In western economies food is a smaller % of overall spending,
but in developing countries, it plays a bigger role. (food
inflation)
Cost push inflation could be caused by a rise in oil prices or other raw materials. Imported inflation could occur after a depreciation in the exchange rate which increases the price of imported goods.