COST PUSH INFLATION

 

Cost-push inflation is a condition in which the cost of labour or raw materials goes up and causes an increase in prices for goods and services. Rapid changes in supply, called supply-side shocks lead to cost-push inflation. This type of inflation can be contrasted with demand-pull inflation, where there is an increase in the demand of goods and services that drives prices up.

Any inflation in an economy can be quite damaging by eroding consumers' purchasing power unless wages keep up with the increase in prices. Cost-push inflation is not any different and often is the result of businesses passing on the increase in production costs to the consumers. Cost-push inflation is unlikely to occur unless demand for the affected products remains steady or is growing.

Causes of Cost-Push Inflation.

Generally, any factor that increases the costs for producers in the supply chain can lead to cost-push inflation. Let us look at some common things that can drive up the production costs and lead to cost-push inflation.

Increased Labour Cost.

If wages increase without corresponding productivity gains, as might happen if unions successfully negotiate higher pay rates, companies will have less money left over after paying their workers' salaries. Increased labour costs can be passed on to the consumer by increasing the price of the final product.

Increased Taxes.

If a government imposes new taxes on specific goods or on importing and exporting specific goods, then these costs could increase the total production cost of a product. These costs either create a smaller profit for the business or more likely, a higher cost to the consumer.

Raw Materials Become Scarce.

Sometimes it becomes difficult to find raw materials because of a natural disaster, war or another event that disrupts the usual flow of materials. When this happens, companies will pass on these increased production costs to consumers by increasing the price of a final product.

Other events might lead to cost-push inflation if it causes production costs to rise. This can be due to limited supply, higher demand or governmental influence.

Pros and Cons of Cost-Push Inflation.

Inflation is often thought of as a bad thing by consumers but there can be both pros and cons when it happens. Below are the most common pros and cons of cost-push inflation, which are pretty similar to any type of inflation.

Pros of Cost-Push Inflation.

Reduced Unemployment: When demand is high then there is typically an increase of jobs available throughout the supply chain. This increase in jobs available strengthens the overall economy.

Higher Wages for Workers: When demand is high, workers have the opportunity to make more money. This is especially true if the roles they are filling are skilled and there is a shortage of the number of people who have that skill.

Increased Consumer Spending Power: During the initial stages of inflation, consumers have an increased level of spending power, especially if interest rates have not been adjusted. This can create economic growth and spur strong spending behaviours.

Cons of Cost-Push Inflation.

Increased Prices: The result of any inflation is going to be increased prices on goods or services. This can impact spending behaviour if consumers are not able to receive more pay for their work as they will have less to spend on products that cost more.

Decreasing Demand: If jobs and wages are not increased then inflation actually can cause a decrease in demand. If consumers have less money to spend then they would not be able to keep up spending at higher prices.

Creates Uncertainty: One of the biggest problems with inflation is that it creates uncertainty with consumers, investors and businesses alike. Businesses and consumers are less likely to make decisions when there is so much unknown about the future as the effects of inflation take place. This can lead to a decrease in spending and investment, which is typically detrimental to the economy.

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