Cost Push Inflation

Definition

Cost push inflation is an increase in general price levels caused by rising production costs such as wages or raw materials. It occurs when businesses pass on these increased costs to consumers through higher prices.

Analogy

Imagine a pizza shop that experiences an increase in the cost of ingredients like cheese and pepperoni. To maintain their profit margins, they raise the prices of their pizzas. This is similar to cost push inflation, where businesses raise prices due to increased production costs.

Related terms

Demand-pull inflation: Demand-pull inflation occurs when overall price levels rise due to increased consumer demand for goods and services.

Wage-price spiral: The wage-price spiral refers to a cycle where higher wages lead to higher production costs, which in turn leads to higher prices, resulting in demands for even higher wages.

Phillips curve: The Phillips curve shows the inverse relationship between unemployment and inflation, suggesting that as unemployment decreases, inflation tends to increase.