BAJAJ BROKING
August 06, 2025
4 mins read
Cost-push inflation refers to a type of inflation that occurs when there is an increase in the cost of producing goods and services, leading to a rise in their prices. This increase in production costs typically originates from factors that are external to the demand for goods and services. For example, if the cost of raw materials, labour wages, or manufacturing components increases, businesses may pass these higher costs on to consumers in the form of higher prices for their final products. This type of inflation can reduce the purchasing power of consumers and potentially lead to a decrease in overall economic output if businesses cut back on production due to reduced profitability or consumer demand weakening.
Cost-push inflation typically arises from an increase in the costs of the factors of production:
When labour unions or market forces lead to higher wages that are not offset by corresponding increases in labour productivity, businesses' production costs rise.
Increases in the cost of essential raw materials, such as oil, metals, or agricultural products, directly translate into higher production costs for industries that rely on them.
Disruptions to the supply chain due to natural disasters, geopolitical events, or pandemics can reduce the availability of goods or components, driving up their prices.
Higher indirect taxes imposed by the government on goods and services or production processes can increase the cost for businesses, which may then be passed on to consumers.
Firms with significant market power can sometimes raise prices even if costs do not increase, but increased input costs can be more easily passed on in less competitive markets.
Effects of Cost-Push Inflation on the Economy
Cost-push inflation can have several effects on an economy:
As prices of goods and services rise, the real income of consumers decreases, reducing their ability to purchase the same quantity of goods as before.
Businesses may face reduced profit margins due to higher production costs. This can lead to decreased investment, scaled-back production, and potentially job losses, slowing economic growth.
Higher prices might lead workers to demand higher wages, which in turn increases production costs further, potentially creating a cycle of rising wages and prices.
If domestic prices rise faster than those in other countries, a nation's exports may become more expensive, reducing their competitiveness in international markets.
The unpredictable nature of rising input costs can make business planning more difficult, impacting long-term investment decisions.
Cost-push and demand-pull are two distinct types of inflation, differing in their origin.
Feature | Cost-Push Inflation | Demand-Pull Inflation |
Origin | Caused by increases in the cost of production (supply-side factors) | Caused by an increase in aggregate demand outstripping supply (demand-side factors) |
Initial Effect | Higher production costs lead to higher prices | Excess demand leads to higher prices |
Supply Curve | Shifts aggregate supply curve to the left (decreased supply) | Shifts aggregate demand curve to the right (increased demand) |
Output | Often associated with reduced output | Often associated with increased output in the short run |
Example | Rise in crude oil prices, increasing transportation costs | Government spending increases, sudden consumer confidence surge |
Scenario | "Too few goods chasing too much money" (less common) | "Too much money chasing too few goods" (more common) |
Several historical and contemporary situations illustrate cost-push inflation:
A classic example occurred in the 1970s when the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo and significant price increases. As oil is a fundamental input for many industries (transportation, manufacturing, energy production), the surge in oil prices led to a broad increase in production costs across economies, resulting in widespread cost-push inflation in many industrialised nations.
In some economies, strong labour unions successfully negotiate significant wage increases for workers. If these wage increases are not matched by improvements in worker productivity, the higher labour costs become a direct cost for businesses. Companies then pass these increased wage costs onto consumers through higher prices for their goods and services.
The global economic environment following the COVID-19 pandemic saw instances of cost-push inflation. Lockdowns, factory closures, and transportation bottlenecks led to shortages of various components and raw materials, including semiconductors, lumber, and shipping containers. These supply chain disruptions increased the cost of inputs for manufacturers globally, compelling them to raise prices for finished products.
Extreme weather events, such as droughts or floods in major agricultural regions, can severely impact crop yields. A reduced supply of staple food crops leads to higher prices for agricultural raw materials. Food processing companies, facing higher input costs, then increase the prices of processed food products sold to consumers.
For countries heavily reliant on imports, a significant depreciation of the domestic currency can make imported raw materials and components more expensive. This increase in the cost of imported inputs can lead to higher production costs for domestic industries, contributing to cost-push inflation within the country.
Inflation is typically measured by tracking changes in the prices of a basket of goods and services over time. Key indices used for measurement include:
Measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It reflects the cost of living.
Measures the average change in the prices of goods at the wholesale level, before they reach retailers. It captures price movements in production and raw materials.
Calculates the average change in the prices at which domestic producers sell their goods. It tracks prices from the seller's perspective.
A measure of the level of prices of all new, domestically produced, final goods and services in an economy. It is broader than CPI or WPI.
Cost-push inflation occurs when the overall price level rises due to increases in the cost of production, such as higher wages, raw material prices, or supply chain disruptions. This type of inflation can reduce purchasing power, impact economic growth, and potentially lead to a wage-price spiral. It fundamentally differs from demand-pull inflation, which originates from excessive aggregate demand. Understanding the causes and effects of cost-push inflation is a part of analysing economic conditions and their potential implications.
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Cost-push inflation is a rise in the overall price level of goods and services. It happens due to increases in the cost of production, such as higher raw material prices or wages, which businesses then pass on to consumers.
The main causes include higher wages, increased costs of raw materials, supply chain disruptions (supply shocks), higher indirect taxes, and the ability of monopolies or oligopolies to pass on increased input costs to consumers.
For consumers, it reduces purchasing power. For businesses, it can lead to lower profit margins, decreased investment, reduced production, and potentially job losses, slowing economic growth.
Cost-push inflation is driven by increased production costs (supply-side factors), leading to higher prices. Demand-pull inflation is caused by excessive aggregate demand for goods and services (demand-side factors), pulling prices upward.
Government policies can attempt to mitigate cost-push inflation through measures such as addressing supply chain issues, controlling excessive wage demands, and implementing fiscal policies that do not add to input costs. However, the effectiveness can vary.
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