Cost-Push Inflation

When the cost of producing goods and services rises, businesses face a choice between accepting lower profits and raising prices. Often, they raise prices, which pushes up the general price level even if demand has not increased.

Common causes include sharp increases in oil and energy prices, disruptions to supply chains, poor harvests that raise food prices, a weaker currency that makes imports more expensive, and wage increases that exceed productivity growth.

For example, a large rise in oil prices increases transport, manufacturing and heating costs across the economy. Businesses then raise prices to cover these costs, leading to higher inflation.

Cost-push inflation is difficult for policymakers. Raising interest rates to control inflation reduces demand, but it does not fix the underlying supply problem, and it may worsen the economic slowdown that rising costs often cause. When cost-push inflation combines with weak growth and rising unemployment, the result is stagflation.