Cost-push Inflation
What Is Cost-Push Inflation
Cost-push inflation refers to the rise in the overall price level of goods and services due to increased production costs. These costs may include wages, raw materials, and energy expenses. When the cost of production rises, businesses pass these additional costs onto consumers in the form of higher prices, leading to inflation. Unlike demand-pull inflation, which is driven by increased consumer demand, cost-push inflation occurs even when demand remains constant or decreases.
Why Cost-Push Inflation Happens
Several factors contribute to cost-push inflation:
- Rising Labor Costs
Higher wages can lead to increased production costs. While wage growth is essential for improving living standards, rapid or excessive wage increases can push businesses to raise prices to maintain profitability.
- Increased Raw Material Prices
When the cost of essential raw materials like oil, metals, or agricultural products rises, it affects the entire supply chain. Energy costs, in particular, have a significant impact because they influence transportation and manufacturing expenses.
- Supply Chain Disruptions
Natural disasters, geopolitical tensions, or other unexpected events can disrupt supply chains, reducing the availability of key inputs. This scarcity drives up the cost of these inputs, which businesses transfer to consumers.
- Government Policies and Regulations
New regulations, taxes, or tariffs can increase production costs. For example, environmental regulations requiring cleaner production methods may raise compliance costs for manufacturers.
How to Measure Inflation
Understanding how inflation is measured is crucial for assessing the impact of cost-push inflation on the economy. Several key indicators help track inflation:
- Consumer Price Index (CPI)
The CPI measures the average change in prices paid by consumers for a basket of goods and services over time. It includes essential items such as food, housing, transportation, and healthcare.
- Producer Price Index (PPI)
The PPI measures the change in selling prices received by domestic producers for their output. Unlike the CPI, which focuses on consumer prices, the PPI tracks price changes at the wholesale level.
- Gross Domestic Product (GDP)
The GDP deflator reflects the overall price level of all goods and services included in a country’s GDP. It measures inflation across the entire economy rather than a specific basket of goods.
- Personal Consumption Expenditures (PCE) Price Index
The PCE Price Index measures price changes in consumer goods and services. It is often preferred by central banks, such as the Federal Reserve, because it provides a broader measure of inflation and accounts for changes in consumer behavior.
