Inflation - What is Cost Push ?
Cost-push inflation (sometimes called supply side), occurs when the cost of producing goods and services goes up, leading to higher prices. This can be caused by a variety of factors, including an increase in the cost of raw materials, labor costs, or taxes.
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One example of cost-push inflation is when the price of oil, a key raw material used in the production of many goods and services, goes up. This can lead to higher transportation costs, which may be passed on to consumers in the form of higher prices for goods and services. Similarly, an increase in labor costs, such as wages or benefits, can lead to higher production costs and ultimately higher prices for goods and services.
Another example of cost-push inflation is when the government imposes new taxes or regulations on businesses. These additional costs may be passed on to consumers in the form of higher prices.
Cost-push inflation can have a number of negative effects on the economy. For one, it can lead to higher costs of living for individuals and families, as they have to pay more for the goods and services they need. It can also create economic inequality, as those with higher incomes are often able to afford the higher prices more easily than those with lower incomes.
In addition, high levels of cost-push inflation can lead to uncertainty and instability in the economy, which can discourage investment and lead to slow economic growth.
Explain it to me like I’m 10 years old
Cost push inflation happens when the things that go into making a product or service become more expensive. Let's say you like to eat pizza. The ingredients that go into making a pizza - like the cheese, sauce, and dough - are called the "costs" of making the pizza. Now, imagine that the price of cheese goes up. This means that it's now more expensive for the pizza shop to make each pizza. In order to make up for this extra cost, the pizza shop might have to raise the price of the pizza. So, when the costs of making something go up, the price of that thing might also go up. This is called cost push inflation.
Now, let's say that the price of pizza goes up because of cost push inflation. That means that you might have to pay a little more money to buy a pizza.
Real Life Example - OPEC and the Oil Crisis of the 1970s
The Organization of the Petroleum Exporting Countries (OPEC) is a global cartel of oil-producing countries that plays a significant role in the global oil market. It was formed in 1960 with the goal of coordinating the petroleum policies of its member countries and ensuring a stable and fair market for oil.
In the 1970s, OPEC and the oil market were disturbed (pure chaos dude) by a series of events that came to be known as the "oil crises." These crises were caused by a number of factors, including political unrest, economic instability, and the increasing demand for oil. The first oil crisis occurred in 1973, when a group of Arab countries, including members of OPEC, embargoed exports of oil to countries that supported Israel in the Yom Kippur War (4th Arab War). This led to a dramatic increase in the price of oil and caused shortages and rationing in many parts of the world. The second oil crisis occurred in 1979, when the Iranian Revolution led to a disruption in the supply of oil from that country. This, combined with concerns about the stability of other oil-producing countries in the Middle East, led to another sharp increase in the price of oil.
The oil crises of the 1970s were a prime example of supply side inflation, also known as cost-push inflation. This type of inflation occurs when the cost of producing goods and services goes up, leading to higher prices for consumers. In the case of the oil crises, the disruptions in the supply of oil led to an increase in the cost of producing goods and services that relied on oil as a raw material or energy source. This included everything from transportation costs to the cost of producing products like plastics and chemicals. As the cost of production went up, businesses were forced to raise their prices in order to cover their costs. This led to an overall increase in the price of goods and services, which is a hallmark of supply side inflation.
The oil crises of the 1970s were a classic example of how disruptions in the supply of a key raw material can lead to cost-push inflation. They also illustrate the potential impact that supply side inflation can have on the global economy, as the increased prices for oil and other goods and services contributed to economic downturns in many countries.
Pros and Cons of Cost Push Inflation:
Supply-related inflation is a type of inflation that occurs when the supply of goods and services is unable to keep up with the demand for them. This can be caused by a variety of factors, such as natural disasters, wars, or increased demand for certain goods and services.
There are both pros and cons to supply-related inflation.
Pros:
Increases in the price of goods and services can sometimes lead to increased profits for businesses, which can in turn lead to economic growth and job creation.
Higher prices can also encourage companies to produce more goods and services in order to meet the increased demand, which can help to boost the economy.
Cons:
Supply-related inflation can lead to higher costs of living for individuals and families, as they have to pay more for the goods and services they need.
It can also create economic inequality, as those with higher incomes are often able to afford the higher prices more easily than those with lower incomes.
High levels of inflation can also lead to uncertainty and instability in the economy, which can discourage investment and lead to slow economic growth.
Cost Push vs Demand Pull
In contrast, demand-pull inflation occurs when there is an increase in demand for goods and services that outstrips the available supply. This leads to competition among buyers, causing prices to rise.
One key difference between the two types of inflation is the underlying cause. Supply side inflation is driven by an increase in production costs, while demand-pull inflation is driven by an increase in demand.
Another difference is the effect on employment. Inflation caused by an increase in production costs may lead to job losses as companies try to cut costs to offset the higher prices. In contrast, demand-pull inflation can lead to increased employment as companies ramp up production to meet the increased demand.
Want More ? Article on Demand Pull Inflation
Fixing Cost Push Inflation
One way to address supply side inflation is through the use of fiscal policy, such as increasing taxes or reducing government spending. This can help to reduce demand and bring down prices. In contrast, monetary policy, such as adjusting interest rates, is more commonly used to address demand-pull inflation.
