Cost Push Inflation
Cost-push inflation is a
condition in which the cost of labour or raw materials goes up and causes an
increase in prices for goods and services. Rapid changes in supply, called
supply-side shocks lead to cost-push inflation. This type of inflation can be contrasted
with demand-pull inflation, where there is an increase in the demand of goods
and services that drives prices up.
Any inflation in an economy can be quite damaging by eroding
consumers' purchasing power unless wages keep up with the increase in prices.
Cost-push inflation is not any different and often is the result of businesses
passing on the increase in production costs to the consumers. Cost-push
inflation is unlikely to occur unless demand for the affected products remains
steady or is growing.
Causes of Cost-Push Inflation.
Generally, any factor that increases the costs for producers in
the supply chain can lead to cost-push inflation. Let us look at some common
things that can drive up the production costs and lead to cost-push inflation.
Increased Labour Cost.
If wages increase without corresponding productivity gains, as
might happen if unions successfully negotiate higher pay rates, companies will
have less money left over after paying their workers' salaries. Increased
labour costs can be passed on to the consumer by increasing the price of the
final product.
Increased Taxes.
If a government imposes new taxes on specific goods or on
importing and exporting specific goods, then these costs could increase the
total production cost of a product. These costs either create a smaller profit
for the business or more likely, a higher cost to the consumer.
Raw Materials Become Scarce.
Sometimes it becomes difficult to find raw materials because of a
natural disaster, war or another event that disrupts the usual flow of
materials. When this happens, companies will pass on these increased production
costs to consumers by increasing the price of a final product.
Other events might lead to cost-push inflation if it causes
production costs to rise. This can be due to limited supply, higher demand or
governmental influence.
Pros and Cons of Cost-Push Inflation.
Inflation is often thought of as a bad thing by consumers but
there can be both pros and cons when it happens. Below are the most common pros
and cons of cost-push inflation, which are pretty similar to any type of
inflation.
Pros of Cost-Push Inflation.
Reduced Unemployment: When demand is high then there is typically an
increase of jobs available throughout the supply chain. This increase in jobs
available strengthens the overall economy.
Higher Wages for Workers: When demand is high, workers have the opportunity to make
more money. This is especially true if the roles they are filling are skilled
and there is a shortage of the number of people who have that skill.
Increased Consumer Spending Power: During the initial stages of inflation,
consumers have an increased level of spending power, especially if interest
rates have not been adjusted. This can create economic growth and spur strong
spending behaviours.
Cons of Cost-Push Inflation.
Increased Prices: The result of any inflation is going to be increased prices on
goods or services. This can impact spending behaviour if consumers are not able
to receive more pay for their work as they will have less to spend on products
that cost more.
Decreasing Demand: If jobs and wages are not increased then inflation actually
can cause a decrease in demand. If consumers have less money to spend then they
would not be able to keep up spending at higher prices.
Creates Uncertainty: One of the biggest problems with inflation is that it
creates uncertainty with consumers, investors and businesses alike. Businesses
and consumers are less likely to make decisions when there is so much unknown
about the future as the effects of inflation take place. This can lead to a decrease
in spending and investment, which is typically detrimental to the economy.
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