Cost inflation

The inflation of costs is that which is manifested in the economy when production costs experience increases that end up being transferred to the prices of goods and services.

When production costs; that is, labor, wages and capital suffer strong increases, whether due to any situation in the economy, companies are forced to transfer them to processed products.

If not, then entrepreneurs would see their profit margins reduced. Continuous reduction of your profit margins could lead to bankruptcy of your companies.

It is useful to note that in order to register in the economies this type of inflation, it is not necessary to verify joint increases of all the cost components. That is, any element that makes up the cost of a product, be it salary, raw material, etc., by itself can be an element that unleashes widespread increases in the prices of goods and services that industries make.

Actually, the world’s economies have suffered this type of inflation. Indeed, since 1970, economies have been impacted by strong oil prices. Component that in several ways enters into the costs of producing services and consumer goods.

Factors that cause cost inflation

The elevation of the components that have to do with the production costs of the companies can happen for several reasons or circumstances. These may be due to natural circumstances, geographical circumstances, stoppages, etc.

We see below what the main reasons that can cause increases in the components of the cost of production of goods and services, as follows:

  • The shortage of natural resources
  • Increase in oil prices
  • Interest Rate Increase
  • Increase in wages
  • Increase in imported raw materials
  • Exchange rate of the currency used for importation. etc.

Whether one of these or another factor that presses on production costs is a cause of cost inflation. In the short term, there are rare exceptions in which the company will absorb an increase in costs. Therefore, whenever a cost component experiences increases, it is expected that the prices of goods will increase in prices .

by Abdullah Sam
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