Cost-Push Inflation: 60 Second Economics for A Level & IB

Cost-push inflation is a rise in the general price level driven by increases in the costs of production for firms. It’s the opposite of demand-pull inflation, which is driven by increased demand.

Think of it like this: Imagine you’re a baker. Flour prices skyrocket. You now have two choices: absorb the loss (likely unsustainable) or raise the price of your bread. You choose the latter. If enough bakers (and other businesses) do the same, overall prices in the economy go up – that’s cost-push inflation.

Key Drivers:

• Rising Wages: Powerful unions securing significant wage increases.
• Raw Material Price Hikes: Think oil shocks or global commodity price surges.
• Devaluation/Depreciation: Making imported goods more expensive.
• Increased Taxes & Regulations: Adding to the cost of doing business.

Consequences:

• Reduced Output: Firms may produce less if costs outpace revenue.
• Increased Unemployment: If firms cut back on production, they may lay off workers.
• Stagflation: The dreaded combination of rising inflation and stagnant economic growth.

In short: Cost-push inflation happens when businesses face higher production costs, forcing them to increase prices. This can lead to a shrinking economy and more job losses, making it a serious economic problem.

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