Cost-Push Inflation

Inflation can be defined as the process of a steady rise in the prices of goods or services over a period of time. Every time the prices in an economy increase, every currency unit buys comparatively lesser goods or services. This condition generally leads to a rapid drop in the purchasing power in the nation. Cost-push inflation is a kind of inflation that mostly takes place when the supply level falls or supply cost increases. 

The cost-push inflation may be caused because of a rise in the prices of raw materials, increased cost of wages, more demand for labour, or shortage of labour. In order to avoid any fall in the producers’ profit, these costs are often paid by the consumers, leading to cost-push inflation. 

The concept of Cost-Push Inflation 

In simple terms, the cost-push inflation is a condition in the economy where the supply of the goods or services increases or decreases even when the demand remains the same. This generally takes place because of monopoly, which refers to the market being dominated by a single seller or producer. 

There are several reasons that lead to cost-push inflation in an economy. Some of these reasons are mentioned below:

• Speculation and hoarding of commodities
• Fluctuation in the prices of crude oil 
• Low growth in the agricultural sector
• Defects in the food supply chain
• Rise in the interest rates by RBI
• Increase in the prices of inputs
• Defects in the supply chain
• Currency depreciation 
• Rise in indirect taxes
• Food inflation

Causes of Cost-Push Inflation 

Although this condition is rarely observed in an economy, the following are the four unique circumstances in which the demand is inelastic.

• Monopoly 

Several companies have successfully managed to achieve a monopoly in an economy. As a result, they attempt to bring the condition of cost-push inflation to earn maximum profit. One common example is the Organisation of Petroleum Exporting Countries that practices a monopoly over oil prices. 

• Wage inflation 

The second and the most common reason for cost-push inflation is wage inflation. Wage inflation generally takes place when workers demand a higher cost of wages, and the producers decide to increase the product cost to meet the workers’ expectations. This was once experienced by the U.S. auto industry when the labour unions successfully pushed for the higher cost of wages. 

• Natural disaster 

At times, natural disasters affect the overall supply of the products, leading to inflation. The 2011 earthquake in Japan disrupted the supply of automobile parts. This natural event limited the supply of a particular product without eliminating or even decreasing the demand; hence, it led to inflation. 

• Rules and regulations

Rules and taxation imposed by the government can reduce the overall supply of goods to a larger extent. In order to cut the demand for alcohol and cigarettes, taxes were imposed on them. However, the prices of these products were raised to meet the taxes, which led to inflation. 

Effects of Cost-Push Inflation on the economy 

Here are some of the most prominent effects of cost-push inflation on the economy – 

• Effects on production 

The rise in prices of goods or services stimulates their production. To gain high profits, the producers utilise all resources to produce more. However, after reaching the stage of total employment, production stops at a certain point as all resources are fully used. This gives rise to the cornering and hoarding of commodities. Sometimes, even after increasing prices, production comes to a still position. This condition is referred to as stagflation. 

• Effects on employment and income 

Another significant impact of inflation is seen on income and employment. As production and spending increase, the national income also increases. Also, it gives rise to employment opportunities due to the higher need for workers. However, the income of the people falls because of the massive fall in the purchasing power of the money. 

• Effects on business and trade 

Factors like high income, enormous spending, and more outstanding production result in inflation as the internal trade increases; however, some firms expand their business to attain higher profits. During inflation, the prices and cost of wages of the workers stop at a point, rising inequality in the economy. 

• Effects of government finance 

During hyperinflation, the government revenue increases as they get revenue in different forms. These include tax, sales tax, excise duties, and so on. However, the government is expected to spend more that will boost public expenditure. The rise in prices reduces the burden of public debt. 

• Effects on growth 

Hyperinflation can negatively affect the development of an economy, but mild inflation contributes to economic growth. In developing countries like India, benign inflation is the ideal condition. 

Conclusion 

Cost-push inflation is a rare case of inflation where the prices of goods or services increase in an economy even when the demand remains the same. There are several reasons why an economy undergoes hyperinflation. This condition mainly occurs because of a rise in the prices of raw materials, increased cost of wages, or a shortage of labour. This condition affects different parts of the economy.