Cost-Push

Cost-Push Inflation

Cost-push inflation occurs when overall prices rise because the costs of production increase and businesses pass those costs on to consumers. It is driven by higher input costs—such as raw materials, wages, taxes, or disruptions to supply—rather than by stronger consumer demand.

Key takeaways

• Cost-push inflation is caused by rising production costs that reduce aggregate supply or raise per-unit costs.
• Firms often respond by increasing prices to protect profit margins.
• It differs from demand-pull inflation, which is driven by excessive aggregate demand.
• Cost-push shocks can contribute to stagflation (rising inflation with slow growth).

How it works

When a firm faces higher input costs, it can either accept lower profits or raise the selling price. If firms broadly increase prices while demand remains similar, the general price level rises. In macroeconomic terms, an adverse supply shock shifts the aggregate supply curve leftward, producing higher prices and lower output.

Common causes

• Raw material price increases (e.g., metals, oil).
• Higher labor costs (minimum-wage hikes, industry-wide wage settlements, strikes).
• Supply-chain disruptions (transport bottlenecks, shortages).
• Natural disasters or geopolitical events that damage production capacity.
• New regulations, taxes, or mandated benefits that raise firms’ operating costs.

Example: 1970s oil shock

When OPEC imposed production cuts and export restrictions in the early 1970s, oil prices surged. Because petroleum is an input for many industries, production costs rose across the economy, leading to higher consumer prices without a corresponding rise in demand—an example of cost-push inflation.

Cost-push vs. demand-pull

• Cost-push inflation: caused by higher costs of production (supply-side).
• Demand-pull inflation: caused by excess aggregate demand relative to supply (demand-side).
  Both raise prices, but policy responses and economic consequences differ.

Wage-price spiral

A wage-price spiral is a reinforcing process where rising wages boost workers’ incomes and demand, prompting firms to raise prices; those higher prices then lead workers to demand further wage increases. This mechanism can perpetuate inflation once it becomes entrenched.

Effects and policy considerations

Cost-push inflation can reduce real incomes and output, and can be harder to address with monetary policy than demand-driven inflation. If policymakers tighten policy to fight inflation caused by supply shocks, they risk deepening economic slowdown. Conversely, doing too little can allow inflation expectations to become unanchored.

Bottom line

Cost-push inflation stems from higher production costs that firms pass on to consumers. It reduces purchasing power and can complicate policy choices, particularly when it coincides with weak economic growth. Understanding whether inflation is supply- or demand-driven is key to choosing an appropriate policy response.