Legal Definitions - cost-push inflation

Cost-push inflation occurs when the overall price level of goods and services rises due to an increase in the costs of producing those goods and services. This happens when businesses face higher expenses for things like raw materials, labor, or transportation, and they pass these increased costs on to consumers through higher prices. Essentially, the "push" for higher prices comes from the supply side of the economy, driven by rising production costs.

• Example 1: Global Energy Price Spike

  Imagine a sudden geopolitical event that significantly disrupts the global supply of crude oil. Oil is a fundamental input for many industries, not just gasoline; it's used to produce plastics, fertilizers, and is crucial for transportation. As the price of crude oil skyrockets, businesses that rely on it for manufacturing or shipping their products face much higher operational costs. To maintain their profit margins, these businesses increase the prices of their finished goods, from plastic toys to food transported by trucks. This widespread increase in prices across various sectors, initiated by the higher cost of oil, is a clear example of cost-push inflation.

• Example 2: Significant Wage Increases

  Consider a scenario where a country implements a substantial increase in its national minimum wage. For businesses in labor-intensive sectors, such as restaurants, retail stores, or cleaning services, their largest operating expense is often employee wages. When the minimum wage rises significantly, these businesses must pay their staff more. To offset these increased labor costs and remain profitable, they often raise the prices of the meals, products, or services they offer to consumers. This general upward trend in consumer prices, stemming directly from higher wage expenses for businesses, illustrates cost-push inflation.

• Example 3: Critical Component Shortage

  Let's say a major natural disaster damages several factories that produce essential semiconductor chips, which are vital components for almost all modern electronics, including cars, computers, and home appliances. The sudden shortage of these chips drives their price up dramatically. Manufacturers of cars, smartphones, and washing machines now have to pay much more for these critical components. Consequently, they increase the retail prices of their finished products to cover their higher input costs. This broad increase in the price of electronic goods and vehicles, triggered by the increased cost and scarcity of a key component, is another clear instance of cost-push inflation.