Cost Push Inflation

Inflation means an increase in the general price level of goods and services. One of the main causes of inflation is cost push inflation. When there is an increase in prices of raw materials and wages leading to an increase in overall price of finished goods because the cost of production increases the manufacturers will not shorten their margins but will increase the finished goods price. Since demand for goods has not changed, and there is increase in cost of production which leads to decrease in aggregate supply i.e. the amount of total  production, and therefore prices increase from production are passed on to consumers creating cost push inflation. Cost push inflation which is determined by supply side factors such as rising nominal wages, rising oil prices, rising food and energy prices and devaluation – rising import prices, shortage of natural resources, government policies (such as taxes) or by an act of war.

Cost push inflation will lead to lower economic growth and can be a cause of fall in standard of living. Cost push inflation can be of three types i.e. Wage push inflation, Profit push inflation and material cost push inflation.

Author: Prof. Nupur Rawal, Assistant Professor, Unitedworld School of Business (UWSB)

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