Cost-push inflation
{{short description|Inflation driven by a rise in the cost of goods and services}}
Image:As AD cost push.svg illustration of aggregate supply (AS) shifting to AS' and causing price level to increase while output shrinks]]
{{Macroeconomics sidebar}}
Cost-push inflation is a purported type of inflation caused by increases in the cost of important goods or services where no suitable alternative is available.
Cause
As businesses face higher prices for underlying inputs, they are forced to increase prices of their outputs. It is contrasted with the theory of demand-pull inflation. Both accounts of inflation have at various times been put forward, with inconclusive evidence as to which explanation is superior.{{cite journal |last1=Samuelson |first1=Paul A. |last2=Solow |first2=Robert M. |title=Analytical Aspects of Anti-Inflation Policy |journal=The American Economic Review |date=1960 |volume=50 |issue=2 |pages=177–194 |jstor=1815021 |url=https://www.jstor.org/stable/1815021 |access-date=16 June 2022 |issn=0002-8282}} Cost-push inflation can also result from a rise in expected inflation, which in turn the workers will demand higher wages, thus causing inflation.{{Cite web |title=Macroeconomics: Policy and Practice |url=https://www.pearson.com/en-us/subject-catalog/p/macroeconomics-policy-and-practice/P200000005991/9780133424386 |access-date=2023-12-30 |website=www.pearson.com}}
Examples
One example of cost-push inflation is the oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the Western world in that decade. It is argued that this inflation resulted from increases in the cost of petroleum imposed by the member states of OPEC. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the price level. Some economists argue that such a change in the price level can raise the inflation rate over longer periods, due to adaptive expectations and the price/wage spiral, so that a supply shock can have persistent effects.{{Cite web|url=https://www.investopedia.com/terms/c/costpushinflation.asp|title=Cost-Push Inflation|last=Kenton|first=Will|website=Investopedia|access-date=2019-02-25}}
Debated existence and opposition to the concept
The existence of cost-push inflation is disputed. Dallas S. Batten described it as a myth, writing "Though the cost-push argument is appealing on the surface, neither economic theory nor empirical evidence indicates that businesses and labor can cause continually rising prices", and identifying the real cause as "increased aggregate demand resulting from increased money growth".{{cite journal |last1=Batten |first1=Dallas S. |title=Inflation: The Cost-Push Myth |journal=Federal Reserve Bank of St. Louis Review |date=June–July 1981 |volume=63 |pages=20–26 |doi=10.20955/r.63.20-26.toh |language=en|doi-access=free }}
Milton Friedman criticised the concept of cost-push inflation,{{cite journal |last1=Schwarzer |first1=Johannes A. |title=Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman and the "Cruel Dilemma" |journal=Journal of Economic Perspectives |date=1 February 2018 |volume=32 |issue=1 |pages=195–210 |doi=10.1257/jep.32.1.195|doi-access=free }} writing "To each businessman separately it looks as if he has to raise prices because costs have gone up. But then, we must ask, 'Why did his costs go up? ... The answer is, because ... total demand all over was increasing."{{cite journal |last1=Nelson |first1=Edward |title=Milton Friedman on Inflation |journal=Economic Synopses |date=2007 |volume=2007 |issue=1 |doi=10.20955/es.2007.1 |publisher=Federal Reserve Bank of St Louis |language=en|doi-access=free }} Friedman wrote, "the inflation arises from one and only one reason: an increase in a quantity of money."{{cite journal |last1=Friedman |first1=Milton |title=How not to stop inflation |journal=Econ Focus |date=2005 |volume=9 |pages=2–7 |url=https://www.richmondfed.org/publications/research/econ_focus/2005/summer/~/media/06AE15D96C75465B97C4E981664E31A2.ashx |access-date=21 June 2022 |publisher=Federal Reserve Bank of Richmond}}