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What is Cost-Push Inflation?
Cost-push inflation occurs when rising production costs force businesses to increase prices, even when overall demand in the economy is weak or stagnant.
Definition
Cost-Push Inflation refers to inflation driven by increases in input costs such as wages, energy, raw materials, or taxes, which reduce supply and push prices higher across goods and services.
Key Takeaways
- Arises from rising production and input costs, not excess demand.
- Common during supply shocks, energy crises, or labour shortages.
- Can occur alongside weak economic growth or high unemployment.
- Frequently associated with stagflationary conditions.
Understanding Cost-Push Inflation
Cost-push inflation emerges when firms face higher costs of production and pass these costs on to consumers through higher prices. Unlike demand-pull inflation, this process does not rely on strong consumer spending or economic expansion.
Typical sources include rising oil and energy prices, increases in wages not matched by productivity gains, supply chain disruptions, and higher taxes or regulatory costs. These factors reduce effective supply and raise prices economy-wide.
Because cost-push inflation can coexist with slowing growth, it presents a challenge for policymakers, as tightening policy to control inflation may further suppress economic activity.
Importance in Business or Economics
- Explains inflation during periods of weak or stagnant growth.
- Influences pricing strategies, cost management, and margins.
- Central to understanding stagflation and supply-side shocks.
- Affects monetary policy trade-offs and inflation control.
Types or Variations
- Energy-Driven Cost-Push Inflation – Caused by rising oil or electricity prices.
- Wage-Driven Cost-Push Inflation – Resulting from higher labour costs without productivity gains.
- Policy-Induced Cost-Push Inflation – Triggered by taxes, tariffs, or regulatory costs.
Related Terms
- Stagflation
- Demand-Pull Inflation
- Supply Shock
- Inflation Expectations
Sources and Further Reading
- Investopedia — Cost-Push Inflation
- International Monetary Fund (IMF) — Inflation Drivers
- Federal Reserve — Inflation and Monetary Policy
Quick Reference
- Inflation driven by rising costs
- Not caused by excess demand
- Often linked to stagflation
Frequently Asked Questions (FAQs)
How is cost-push inflation different from demand-pull inflation?
Cost-push inflation is driven by higher production costs, while demand-pull inflation results from strong consumer demand.
Can cost-push inflation occur during a recession?
Yes. Rising costs can push prices higher even when economic activity is weak.
How do policymakers respond to cost-push inflation?
Responses are complex and may involve balancing inflation control with growth support.
