Cost-Push Inflation: What Is It?
When overall prices rise (inflation) as a result of rising costs for wages and raw materials, this phenomenon is referred to as cost-push inflation, also referred to as wage-push inflation. The total amount of production in the economy may decline as a result of higher manufacturing costs. Cost-push inflation results from the manufacturing price increases being passed on to consumers because the demand for goods hasn’t altered.
Demand-pull inflation and cost-push inflation are comparable.
Knowledge of Cost-Push Inflation
An economy’s rate of price increases for a selection of products and services is known as its inflation rate. If wages haven’t improved sufficiently or kept pace with price increases, inflation can reduce a consumer’s purchasing power. The executive management of a firm may attempt to pass on higher production costs to customers by increasing the price of their goods. The company’s profits will decline if it doesn’t raise prices to offset rising production expenses.
A rise in the cost of manufacturing, which may be anticipated or unanticipated, is the most frequent cause of cost-push inflation. For instance, rising costs for inventories or raw materials utilized in production may result in higher prices.
Demand for the impacted product must not alter while manufacturing cost increases are taking place for cost-push inflation to occur. Producers raise the price to the consumer to cover the increasing cost of production in order to preserve profit margins and keep up with anticipated demand.
Cost-Push Inflation’s Root Causes
An increase in the price of raw materials and other industrial inputs, as previously mentioned For instance, businesses may pass on the additional expenses to their customers if they use copper in their manufacturing process and the price of the metal suddenly increases.
Cost-push inflation can result from higher labor costs, as can obligatory wage increases for production workers brought on by an increase in the minimum wage for each worker. A worker walkout brought on by protracted contract talks might potentially cause production to fall, which would raise costs.
Natural disasters, which can include floods, earthquakes, fires, or tornadoes, are frequently unanticipated contributors of cost-push inflation. Higher production expenses are likely to follow if a significant disaster results in unforeseen damage to a production facility and shuts down or partially disrupts the production chain. A business may be forced to raise prices in order to partially offset disaster-related losses. Although not all natural disasters raise manufacturing costs, they often don’t cause inflation due to cost pressure.
Other occurrences, such as a rapid change in administration that impairs the nation’s capacity to maintain its prior output, may qualify if they increase production costs. However, developing countries are more likely to experience rises in manufacturing costs brought on by the government.
Even though they are frequently expected, business costs may grow as a result of government regulations and changes to existing laws because these factors cannot be offset. For instance, the government may impose a requirement that healthcare be supplied, raising the cost of hiring personnel or labor.
Demand-Pull vs. Cost-Push
Demand-pull inflation is the term used to describe price increases brought on by consumers demanding more products. When demand grows to an extent that production cannot keep up, this is known as demand-pull inflation, and increased prices are often the outcome. In other words, while demand-pull inflation is driven by consumer demand and cost-push inflation is driven by supply costs, both result in higher prices being passed on to consumers.
Cost-Push Inflation Example
Thirteen oil-producing and oil-exporting nations make up the Organization of the Petroleum Exporting Countries (OPEC), a cartel. Due to geopolitical circumstances, OPEC placed an oil embargo on the United States and other nations in the early 1970s. In addition to imposing oil output cuts, OPEC prohibited oil shipments to specific nations.
Following a shock to the supply, the price of oil quadrupled from about $3 to $12 per barrel.
Since there was no growth in commodity demand, cost-push inflation resulted. Gas prices increased as a result of the supply disruption, which also increased manufacturing costs for businesses that used petroleum-based products.
Why does inflation occur?
Economic experts continue to disagree on the precise causes of inflation, which is a general increase in prices. According to monetarist beliefs, inflation results from an increase in the amount of money in an economy, which raises prices. According to the cost-push inflation theory, as production prices rise as a result of factors like rising salaries, these higher costs are transferred to consumers. According to the theory of demand-pull inflation, prices increase when overall demand outpaces the supply of readily available products for extended periods of time.
Can inflation ever be good?
Theoretically, a low level of inflation may indicate a thriving economy. However, high inflation can be harmful (but deflation, or declining prices, can be too). Note that not all persons are negatively impacted by inflation. For instance, whereas savers and lenders suffer from inflation, borrowers with fixed interest rates typically benefit from it.
The Wage-Price Spiral: What Is It?
The wage-price spiral is an interpretation of the cost-push inflation theory that contends that rising wages increase demand, which in turn raises prices. The cycle then repeats as workers seek even greater wages in response to these increased prices.
