Cost Push Inflation

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Also known as Supply-shock Inflation, Cost Push Inflation is an economic phenomena where there is an escalation in the normal level of prices, owing to increases in input costs. In fact, a condition where there is a continuous rise in the general price levels due to increasing output costs, gives birth to what is called the Cost Push Inflation. Cost Push Inflation takes place when no alternative is available to control the increase in the prices of significant goods and services on large scales.

Causes responsible for the rise of Cost Push Inflation:
  • Cost Push Inflation develops when the high cost of inputs lead to a fall in aggregate supply. But the demand for the good is consistent. This leads to a situation where the demand for the final good exceeds the supply . This in turn causes a rise in the general price level.
  • Following 3 factors may be considered as reasons for the emergence of Cost Push Inflation:
    • Imported Inflation: This condition arises when import of products either in the raw or finished state becomes more costly, owing to the depreciation of currency.
    • Enhancements of corporate taxes
    • Escalation in the wages

  • Escalation in the cost of labor caused by wage increases, becomes greater than the increase in productivity in labor-intensive industries. This leads to the emergence of Cost Push Inflation in such industrial sectors.
Opinions of different schools of thought about Cost Push Inflation:
  • Keynesian School of Thought: Countering the existing concept of Cost Push Inflation, the Keynesian theory opines that several prices are downward inflexible or sticky downward in nature in a contemporary industrial economy. Here, instead of price falling, a supply shock results in a depression characterized by decrease in the Gross Domestic Product (GDP) and rise in unemployment. It is the cost of such a depression which perhaps forces the government and the central banks of a country to permit a supply shock, which ultimately results in inflation.
  • The Austrian School: The arguments of the economists belonging to the Austrian School of Thought go against the concept of Cost Push Inflation. In their view, enhancement of the cost of goods and services does not necessarily bring about inflation, without cooperations from the government and the central banking sectors of a country. According to these economists, with the supply of money remaining constant, escalation in the cost of goods or services will reduce the money available for other goods and services, As a result, prices of certain commodities will decrease, initiating the rise in the prices of those goods whose prices have already increased.