Toto: New encyclopedia article: Cost Push Inflation

2026-10-06T04:44:28Z

New encyclopedia article: Cost Push Inflation

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'''Cost push inflation''' is a type of [[Inflation|inflation]] that arises from increases in the costs of production—such as wages, raw materials, or energy—that firms pass on to consumers in the form of higher prices. Unlike demand pull inflation, which originates in excessive demand, cost push inflation originates on the supply side of the economy, and it typically reduces output even as it raises prices, a combination known as [[Stagflation|stagflation]].

== Definition ==

Cost push inflation occurs when the costs of production rise, causing firms to raise prices in order to maintain their profit margins. The rise in costs shifts the [[Aggregate Supply|aggregate supply]] curve to the left, raising the price level and reducing output.

The essential feature of cost push inflation is that it is not caused by excess demand. Instead, it results from factors that increase the costs firms must pay for inputs—whether labour, energy, raw materials, or capital. Because these higher costs are passed on to consumers, prices rise even though demand has not increased.

== Causes ==

Cost push inflation can be triggered by several factors.

'''Rising wages''' are a classic cause. If workers obtain wage increases that exceed productivity growth, unit labour costs rise, and firms pass these higher costs on to consumers. Wage-price spirals can develop if workers then demand further increases to compensate for the higher prices.

'''Rising energy prices''', particularly oil, are a major source of cost push inflation. Oil is a key input throughout the economy, so higher oil prices raise costs across a wide range of industries. The oil price shocks of the 1970s are the classic example.

'''Rising raw material prices''', driven by global demand or supply disruptions, raise costs for manufacturers.

'''Supply shocks''', such as natural disasters, pandemics, or geopolitical events that disrupt production, raise costs and reduce supply.

'''Rising import prices''', whether due to exchange rate depreciation or foreign inflation, raise the cost of imported inputs.

'''Higher taxes or regulatory costs''' imposed on firms can also raise production costs.

'''Monopoly or oligopoly power''' in input markets can enable suppliers to raise prices above competitive levels.

== The mechanism ==

The mechanism of cost push inflation operates through the interaction of aggregate supply and demand.

When costs rise, the short-run aggregate supply curve shifts leftward. At the original price level, firms would be willing to supply less output. As the price level rises, output falls—a movement along the aggregate demand curve—until a new equilibrium is reached with higher prices and lower output.

The key feature is that cost push inflation involves a '''simultaneous increase in prices and reduction in output'''. This differs from demand pull inflation, in which prices and output rise together. Because unemployment typically increases as output falls, cost push inflation presents a particularly difficult challenge for policymakers.

== The policy dilemma ==

Cost push inflation creates a dilemma for policymakers, because the tools available to address inflation and unemployment work in opposite directions.

'''Contractionary policy''', such as raising interest rates or cutting government spending, would reduce inflation but would further reduce output and raise unemployment—worsening the very problem that accompanies cost push inflation.

'''Expansionary policy''' would support output and employment but would exacerbate inflation.

This dilemma was a central issue during the stagflation of the 1970s, when industrialised economies experienced both high inflation and high unemployment simultaneously. The experience confounded the traditional Phillips curve relationship, which had suggested a stable trade-off between inflation and unemployment, and it contributed to the development of the expectations-augmented Phillips curve and to the rise of monetarist thinking.

== Accommodation versus resistance ==

Policymakers face a choice between accommodating and resisting cost push inflation.

'''Accommodation''' involves allowing the higher costs to be reflected in higher prices, avoiding a contraction in output, but risking the entrenchment of inflation. If the central bank accommodates by expanding the money supply, it validates the higher prices and may set off an inflationary spiral.

'''Resistance''' involves refusing to accommodate, holding the money supply steady and allowing output to fall, which restrains inflation but at the cost of higher unemployment. This approach is sometimes described as "leaning against the wind."

The appropriate response depends on the source of the cost increase, its expected persistence, and the credibility of the monetary authority.

== Comparison with demand pull inflation ==

{| class="wikitable"
! Feature
! Cost push inflation
! [[Demand Pull Inflation|Demand pull inflation]]
|-
| Origin
| Supply side
| Demand side
|-
| Cause
| Rising production costs
| Excess aggregate demand
|-
| Output effect
| Output falls
| Output rises
|-
| Unemployment
| Rises
| Falls
|-
| Policy response
| Difficult trade-off
| Contractionary policy effective
|}

== Historical examples ==

The '''oil price shocks''' of 1973–1974 and 1979–1980 produced sharp cost push inflation in industrialised economies, contributing to the stagflation of the 1970s. The '''commodity price boom''' of the 2000s had similar effects in some economies. More recently, the disruptions associated with the COVID-19 pandemic, including supply chain bottlenecks and energy price increases, contributed to cost push inflation in many countries.

== See also ==

* [[Demand Pull Inflation]]
* [[Inflation]]
* [[Stagflation]]
* [[Supply Shock]]
* [[Aggregate Supply]]

== References ==

<ref name="r1">International Monetary Fund, ''Finance and Development'' series on inflation.</ref>
<ref name="r2">OECD, ''Economic Outlook'' analyses of inflation dynamics.</ref>
<ref name="r3">Bank for International Settlements, research on inflation and supply shocks.</ref>

<references />

Cost Push Inflation - Revision history

Toto: New encyclopedia article: Cost Push Inflation