Cost-Push

Published Jun 25, 2023

Definition of Cost-Push

Cost-Push inflation is an economic phenomenon that happens when the cost of production increases, leading to an overall increase in the prices of goods and services. Cost-Push inflation can occur due to various reasons, such as an increase in the cost of labor, raw materials, taxes, or transportation. In other words, cost-push inflation happens when there is a reduction in the supply of goods and services due to an increase in costs.

Example

One common example of cost-push inflation can be seen in the oil and gas industry. Let’s imagine a situation where oil-producing countries decide to increase oil prices substantially, resulting in increased production costs for manufacturing companies. As a result, the cost of production increases, leading to higher prices for goods and services that use oil in their production process. This, in turn, leads to a decrease in the overall supply of goods and services: some consumers will not be able to afford the higher prices, while some manufacturers may stop producing entirely due to the high cost of production.

Why Cost-Push Matters

Cost-push inflation is an important economic concept that policymakers need to take into account when making economic decisions. Inflation, in general, reduces the purchasing power of money, leading to a decrease in demand for goods and services, lower investment, and negative economic growth. Hence, policymakers need to strike a balance between controlling inflation and promoting economic growth. Understanding cost-push inflation is critical for policymakers as it allows them to identify the root cause of inflation and take measures to control it.