Chapter 17, Problem 11AA

To determine

To discuss: The causes of cost-push inflation.

Explanation of Solution

Cost-push inflation is an economic concept linked with inflation. It refers to a situation wherein increase in cost of production lead to an increase the price (inflation).

Following are the main causes of cost-push inflation:

1. Monopoly: Companies with monopoly in the market can create a situation of cost-push inflation. The company may restrict supply to achieve its target profit which will increase the prices of critical commodities like oil. This will result in increased cost of transportation and all the firms will experience increased cost.
2. Increase in wages: Labor cost forms a huge part of total costs in a firm. If the employees manage to get increased wages then it will increase the overall cost of production in firms. This will result in cost-push inflation.
3. Natural disasters: Natural disasters can often result in cost-push inflation. This is possible if a natural disaster manage to disrupt the production process or lead to complete/partial shutdown of production chain as it will increase the cost of production. Following which, a company would probably increase the prices to cover some loss from natural disaster.
4. Taxes and regulations by the government: The government impose taxes on products as it is their source of income and higher taxes are imposed on certain product with an expected decrease in the demand, for example cigarettes. However, the demand remained unchanged or little change and it led to increase in price resulting in cost-push inflation.
5. Exchange rate: If the value of currency falls then the imports will become costly and foreign supplier won’t reduce prices to attain the target profit. This will lead to increased prices of imports resulting in cost-push inflation.