What is Cost-Push Inflation?

//What is Cost-Push Inflation?
What is Cost-Push Inflation? 2017-10-02T07:37:35+00:00

Definition: Cost-push inflation is loss in buying power of a currency due to an increase in the costs of production and raw materials. Higher production costs lead to lower supply for particular goods and services, and when the demand is unchanged, the price of these goods and services cause a rise in the general price level.

What Does Cost-Push Inflation Mean?

What is the definition of cost-push inflation? This type of inflation is triggered because the supply of certain goods and services is lower. When an economy endures cost push inflation, the general price level increases because the prices of goods and services increase due to higher production and raw material costs.

Other factors that may trigger CP inflation include natural disasters, monopolies or government interventions that may increase taxation. In general, cost push inflation is also related to inelastic demand while the supply is lower due to higher production and raw material costs. This is when the demand for certain goods and services are not directly affected by changes in price. Thus, demand for the product will remain the same as prices increase resulting in consumers being able to purchase less goods with the same amount of money.

Let’s look at an example.

Example

On October 1973, the member countries of the Organization of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo against the United States as a response to their involvement in the Yom Kippur War. By March 1974, the price of oil had skyrocketed to $12 per barrel, a 300% increase from $3 per barrel before the embargo.

The supply of oil decreased as a result of the embargo, thereby lowering the supply of oil in the United States, while demand remained unchanged. Furthermore, as the oil prices surged, the general price level increased.

This is an example of cost-push inflation. Oil is a substantial raw material, which is broadly used in the production process. Therefore, an increase in the cost of a raw material led to a lower supply of oil, and with demand being unchanged, the rise in the price of oil led to an increase in the general price level.

Summary Definition

Define Cost-Push Inflation: Cost push inflation is decrease in purchasing power due to increased product prices because production cost increased.