cost-push inflation

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Related to cost-push inflation: demand-pull inflation, Phillips curve

Cost-push inflation

Inflation caused by rising prices, usually from increased raw material or labor costs that push up the costs of production. Related: Demand-pull inflation.

Cost-Push Inflation

Inflation caused by rising costs of production. For example, if the price of a barrel of oil rises significantly, this could cause fuel prices to increase which, in turn, increases costs for transportation of food, tools, and other goods, which can cause some level of inflation across an economy. Cost-push inflation contrasts with demand-pull inflation, which is caused by a rise in demand on the part of consumers.

cost-push inflation

Rising consumer prices caused by businesses passing along increases in their own costs for labor and materials. Cost-push inflation does not necessarily result in rising corporate profits because businesses may be unable to pass through all of their cost increases. Compare demand-pull inflation.

cost-push inflation


cost-push inflation

a general increase in PRICES caused by increases in FACTOR INPUT costs. Factor input costs may rise because raw materials and energy costs increase as a result of world-wide shortages or the operation of CARTELS (oil, for example) and where a country's EXCHANGE RATE falls (see DEPRECIATION 1), or because WAGE RATES in the economy increase at a faster rate than output per man (PRODUCTIVITY). In the latter case, institutional factors, such as the use of COMPARABILITY and WAGE DIFFERENTIAL arguments in COLLECTIVE BARGAINING and persistence of RESTRICTIVE LABOUR PRACTICES, can serve to push up wages and limit the scope for productivity improvements. Faced with increased input costs, producers try to ‘pass on’ increased costs by charging higher prices. In order to maintain profit margins, producers would need to pass on the full increased costs in the form of higher prices, but whether they are able to depends upon PRICE ELASTICITY OF DEMAND for their products. Important elements in cost-push inflation in the UK and elsewhere have been periodic ‘explosions’ in commodity prices (the increases in the price of oil in 1973, 1979 and 1989 being cases in point), but more particularly ‘excessive’ increases in wages/ earnings. Wages/earnings account for around 77% of total factor incomes (see FUNCTIONAL DISTRIBUTION OF INCOME) and are a critical ingredient of AGGREGATE DEMAND in the economy. Any tendency for money wages/earnings to outstrip 99 underlying PRODUCTIVITY growth (i.e. the ability of the economy to ‘pay for/absorb’ higher wages by corresponding increases in output) is potentially inflationary. In the past PRICES AND INCOMES POLICIES have been used to limit pay awards. At the present time, policy is mainly directed towards creating a low inflation economy (see MONETARY POLICY, MONETARY POLICY COMMITTEE), thereby reducing the imperative for workers, through their TRADE UNIONS, to demand excessive wage/earnings increases to compensate themselves for falls in their real living standards.

The Monetary Policy Committee, in monitoring inflation, currently operates a ‘tolerance threshold’ for wage/earnings growth of no more than 4-1/2% as being compatible with low inflation (this figure assumes productivity growth of around


References in periodicals archive ?
cost-push inflation could occur caused by "the psychology of workers and by the policies of employers and trade unions.
Li said, 'This round of price inflation was triggered by 'cost-push' movement, but if monetary policy is too loose, it will cause cost-push inflation to become more serious inflation.
The government should do its utmost to prevent stagflation, which is a recession accompanied by cost-push inflation.
It is obvious from the new taxation proposals and expenditure reduction strategy that the budget would promote cost-push inflation.
The bank said, "The downward trend of inflation stemmed from the slumped domestic demand which helped reduce pressure from the demand-pull inflation while the continued appreciation of the baht helped mitigate the cost-push inflation from potentially rising oil prices.
He pointed out that in the 1970s devaluation as a policy tool had been given a bad name because it generated cost-push inflation.
High input costs across all sectors have tended to generate a self-propelling cost-push inflation spiral.
Cost-push inflation has its roots at the other end of the economic system.
I really don't see cost-push inflation in these data,'' said Lincoln Anderson, economist for the Fidelity mutual fund group in Boston.
Samuelson and Solow (1960) argued that if costs and prices are insignificantly sensitive to demand-restraint policies such that unemployment significantly increases, then cost-push inflation is dominant; and likewise the reverse is true for demand-pull inflation.
This means there is no cost-push inflation in the pipeline where rising costs would push up prices, and long-term interest rates will not be moving up significantly this year or next," he said.
Increase in the rates of utilities produces 'the multiplier effect', leading to cost-push inflation making it impossible for the local producers to compete in the world market.