Learn effective strategies to overcome cost-push inflation in economics. Increase productivity, invest in technology, diversify suppliers, monitor market trends.
If in an economy, price level rises due to increase in costs of production It is given the name of cost push inflation. In such type of inflation the inflation and unemployment go side by side.
Higher production costs can reduce aggregate supply in the economy. Since demand for goods remains unchanged, the increased prices of production are passed on to consumers, creating cost-push inflation .Quoting and Forbes , cost push inflation occurs when demand remains static or grows as prices rise higher. If demand for goods or services falls as prices rise, then inflation remains weak.
Trade Unions and Cost Push Inflation:
Now-a-days the trade unions are very strong. They never let their real wages to fall. More often they force to increase their monetary wages more than increase in prhs^ level of the country. As a result the cost of production of firms increases This leads to increased in price level. Due to decrease in AS the level of output and employment decrease This result in unemployment in the economy It may also happen that the labor class is preferring leisure over work As a result the labor market is tightened. Hence the wages start rising This situation would generate inflation.
Causes of cost push inflation
There are several factors that can cause cost push inflation . Here is the explanation:
- Increase in input cost
The increase in input costs is one of the main causes of cost push inflation .
When the costs of producing goods and services increase, producers tend to raise their selling prices to cover these higher costs.
This then causes an increase in the overall prices of goods and services in the market.
- Increased labor costs
Increases in labor costs can create cost-push inflation such as when mandatory wage increases for production employees are due to an increase in the minimum wage per worker.
Worker strikes due to stalled contract negotiations can also lead to decreased production and, as a result, higher prices.
- Natural disasters
If a major disaster causes unexpected damage to production facilities and results in the closure or partial disruption of the production chain, higher production costs are likely to follow.
A company may have no choice but to raise prices to help cover some of the losses from a disaster.
- Changes in government policy
Changes in government policy, such as tax increases, tighter environmental regulations, and trade policies that lead to increased costs of input goods, are among the causes of cost push inflation .
This policy increases production costs for companies, prompting them to raise product prices to maintain desired profit margins, and ultimately impacts the overall inflation rate.
How to Overcome Cost Push Inflation in Economics.
Several efforts can be made to overcome the occurrence of cost push inflation, namely:
- Production cost control
Governments and companies can work together to control rising production costs, for example by increasing operational efficiency or diversifying sources of raw materials.
- Monetary policy
Central banks can use monetary policy to control inflation, for example by raising interest rates to reduce consumer spending and investment.
- Fiscal policy
Governments can use fiscal policies, such as tax cuts or subsidies, to reduce the burden of production costs on companies.