What Is Cost-Push Inflation: Meaning, Causes and Examples

Cost-push inflation or wage-push inflation is the type of inflation triggered by considerable augmentations in the cost of the factors of production, which include land, labour, capital, and organisation.

This phenomenon cannot be altered by any method, and it eventually causes a reduction in the supply of these items. Unlike demand-pull inflation, which causes when aggregate demand goes beyond aggregate supply, cost-push inflation leads to deterioration in economic growth and sometimes causes a reduction in living standards.

Usually, any factor that increases manufacturers' costs in a supply chain may cause cost-push inflation. Mentioned below are some common causes behind this economic phenomenon:

• Enlarged Labour Costs: Labour costs are meant to be the potential source of inflation as they consider a large proportion of total costs borne by businesses. If the wage escalation does not match the productivity gains, small-scale and large-scale enterprises will suffer from money shortages after paying salaries to their workers. Consequently, the business may pass on enhanced labour costs to customers by increasing the total cost of the final product.
• Raw Materials Become Limited: Often it becomes challenging to obtain raw materials in the event of a natural calamity, such as flood, drought, cyclone, earthquake, and war, adversely affecting the flow of materials. Under such circumstances, companies and manufacturers are left with no option but to impose these enhanced production costs on customers by escalating the total price of a finished product.
• Higher Price of Merchandise: An escalation in the price of crude oil can raise petrol prices alongside increasing transportation charges. Therefore, with the rise of transportation costs, commodities will experience cost-push inflation while increasing the merchandise cost.
• Increased Taxes: If the government levies new taxes on certain products or specific imported and exported goods, their costs tend to escalate the total price of the production of merchandise. These costs generate smaller profits for a business or a higher cost to the purchaser.
• Government Regulation and Taxation: The fifth driver responsible for causing cost-push inflation is government rules, regulations, and taxation. These rules may diminish the supply of various products. Taxes imposed on alcohol or cigarettes are meant to pull down the level of demand for these harmful products. Consequently, it heightens these items' prices, leading to inflation. Besides, as the expansionary fiscal policy tends to increase inflation, so does the monetary policy.
• Exchange Rates: The next factor liable for causing cost-push inflation is a change in the exchange rates. If a country allows its currency's value to drop, it will surely face an escalation in import prices. This is because the foreign supplier may not agree with the reduction in their products' value alongside the currency's monetary value. If an inelastic demand occurs, it can increase the price and keep the profit margin untouched.
• Effect of Depreciation: Depreciation upsets imports since the imported merchandise turns more expensive due to the reduced value of the currency. As the products become costlier, it will lead to inflation.

Mentioned below are three common examples of cost-push inflation:

• In case the manufacturing of car tyres becomes double its usual price, those tyres' costs may increase, leading to cost-push inflation. This can even make a vast impact on the car market since car manufacturers will have no option but to increase the prices of their car models.
• Another example of cost-push inflation is the price rise in food grains such as paddy (rice plant). Suppose a severe natural disaster, such as an earthquake, flood, etc., takes place and destroys the fields of rice plantations. Under such circumstances, rice availability in the market will be affected spontaneously, making its price escalate owing to the shortage in rice plantations. This way, it leads to cost-push inflation.
• One of the most common examples of cost-push inflation occurs in the energy sector, such as petrol and natural gas. Since both of them are highly demanding across the globe, so in case of any global policy, battle, or natural calamities occur, that will cause a drastic reduction in the oil supply. Thus, it leads to an escalation of gasoline prices since the demand remains pretty stable even after shrinkage in supply.

When it comes to natural gas, if there is a stoppage in a natural gas pipeline owing to cyber theft, it can reduce the supply of natural gas. Nevertheless, it will increase their prices despite stable demand.

From the above, you will understand what cost-push inflation is. This type of inflation is usually hard to control, so central banks and governments should adopt monetary and fiscal policies to manage them. The cost-push inflation can lead to various problems, such as unemployment and reduced demand.

Once customers start anticipating cost-push inflation, they can control spending money lavishly since they are conscious of future price escalation of goods and services.