Cost-Push Inflation

Cost-Push Inflation

Subject: Economy

Section :Inflation

It is “supply-side, cost-push” factors which affect the prices of most of the items constituting the CPI.

The clear worry is that the recent Monetary Policy Committee move could potentially raise costs for all borrowers and lead to further price increases.

Cost-Push Inflation:

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.

Apart from rise in prices of inputs, there could be other factors leading to supply side inflation such as :

• Natural disasters or depletion of natural resources,
• Monopoly-single seller selling limited goods at comparatively higher price.
• Government regulation or taxation- especially indirect tax that raises price of of commodity
• Change in exchange rates-currency devaluation or depreciation making imports expensive
• Imported inflation-rise in price of imported goods

Generally, cost push inflation may occur in case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.

Cost-Push vs. Demand-Pull Inflation:

Cost-push is one of the two causes of inflation. The other is demand-pull inflation. Demand-pull inflation is the primary cause of inflation. It occurs when the aggregate demand for a good or service outstrips aggregate supply, and it starts with an increase in consumer demand. Sellers try to meet the higher demand with more supply. If they can’t, then they raise their prices.