Cost-push inflation is a purported type of
inflation
In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
caused by increases in the cost of important
goods
In economics, goods are anything that is good, usually in the sense that it provides welfare or utility to someone. Alan V. Deardorff, 2006. ''Terms Of Trade: Glossary of International Economics'', World Scientific. Online version: Deardorffs ...
or services where no suitable alternative is available.
Cause
As businesses face higher prices for underlying inputs, they are forced to increase prices of their outputs. It is contrasted with the theory of
demand-pull inflation. Both accounts of inflation have at various times been put forward, with inconclusive evidence as to which explanation is superior.
Cost-push inflation can also result from a rise in expected inflation, which in turn the workers will demand higher wages, thus causing inflation.
Examples
One example of cost-push inflation is the
oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the
Western world
The Western world, also known as the West, primarily refers to various nations and state (polity), states in Western Europe, Northern America, and Australasia; with some debate as to whether those in Eastern Europe and Latin America also const ...
in that decade. It is argued that this inflation resulted from increases in the cost of
petroleum
Petroleum, also known as crude oil or simply oil, is a naturally occurring, yellowish-black liquid chemical mixture found in geological formations, consisting mainly of hydrocarbons. The term ''petroleum'' refers both to naturally occurring un ...
imposed by the member states of
OPEC
The Organization of the Petroleum Exporting Countries (OPEC ) is an organization enabling the co-operation of leading oil-producing and oil-dependent countries in order to collectively influence the global oil market and maximize Profit (eco ...
. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the
price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. ...
. Some economists argue that such a change in the price level can raise the
inflation rate
In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
over longer periods, due to
adaptive expectations
In economics, adaptive expectations is a hypothesized process by which people form their expectations about what will happen in the future based on what has happened in the past. For example, if people want to create an expectation of the inflatio ...
and the
price/wage spiral, so that a
supply shock can have persistent effects.
Debated existence and opposition to the concept
The existence of cost-push inflation is disputed. Dallas S. Batten described it as a myth, writing "Though the cost-push argument is appealing on the surface, neither economic theory nor empirical evidence indicates that businesses and labor can cause continually rising prices", and identifying the real cause as "increased aggregate demand resulting from increased money growth".
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...
criticised the concept of cost-push inflation,
writing "To each businessman separately it looks as if he has to raise prices because costs have gone up. But then, we must ask, 'Why did his costs go up? ... The answer is, because ... total demand all over was increasing."
Friedman wrote, "the inflation arises from one and only one reason: an increase in a quantity of money."
See also
*
Stagflation
Stagflation is the combination of high inflation, stagnant economic growth, and elevated unemployment. The term ''stagflation'', a portmanteau of "stagnation" and "inflation," was popularized, and probably coined, by British politician Iain Mac ...
*
Demand-pull inflation
*
Triangle model
References
{{Economics
Inflation
1973 oil crisis