Question

Distinguish between 'cost-push' and 'demand -pull' inflation? Explain any four causes of cost-push inflation.

Answer 1

• Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
• Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macro economy: households, business, governments, and foreign buyers.
• An increase in the costs of raw materials or labor can contribute to cost-pull inflation.
• Demand-pull inflation can be caused by an expanding economy, increased government spending, or overseas growth.

Cost-push Inflation—Cost-push inflation occurs when rise in price is due to rise in the cost of production. In this type of inflation, demand factor remains unchanged and supply factor plays an important role. Once this type of inflation sets in one industry, it spreads to all other industries of an economy. Main causes of cost-push inflation are:

1. Higher Wage Rates—Strong trade union ensures payment of higher wages. Due to this the producer shifts the burden Of increase in cost to the consumer through price rise. An increase in price makes cost of living more expensive whereby again union demands more wages. Thus, it becomes never-ending wage price spiral.
2. Higher Profit Margin—Producers charge higher price to earn higher profit margin.
3. Higher Taxes—Sometimes, rise in the price of the commodity is due to increase in excise duties and other taxes imposed by the government. Due to this the producer raises the price.
4. Fall in the Availability of Basic Inputs—A fall in the supply of raw materials will raise their prices and hence, increase cost of production.
5. Administered Higher Prices of Inputs—An increase in price of inputs by the government raises the general price level.