Cost push inflation is an economic phenomenon characterized by an increase in the overall price level of goods and services in an economy due to rising costs of production. It occurs when the costs of inputs, such as wages, raw materials, or energy, that are essential in the production process, experience a significant increase.
In a cost push inflation scenario, businesses face higher production costs, forcing them to adjust their prices upwards in order to cover these increased expenses. This, in turn, leads to a general rise in prices throughout the economy, reducing the purchasing power of consumers.
This type of inflation can be triggered by various factors. For instance, a sudden surge in the prices of raw materials, like oil or metals, can elevate production costs. Additionally, if labor unions negotiate higher wages for workers, businesses may encounter increased labor expenses, leading to cost push inflation. Furthermore, any government-imposed regulations or taxes that raise the cost of production can also contribute to this type of inflation.
Cost push inflation is believed to be harmful to an economy, as it erodes the real value of money and reduces the standard of living for individuals. As prices rise, consumers' purchasing power diminishes, making it more difficult for them to afford the same quantity of goods and services.
Monetary policy measures, such as controlling money supply and interest rates, are often employed by central banks to mitigate cost push inflation. By managing these factors, central banks aim to stabilize prices and ensure economic growth while keeping inflation under control.
