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Cost-Push Inflation

Cost-push inflation refers to a decrease in the aggregate supply of goods and services driven by increased production costs. When companies are already running at full capacity – they cannot maintain profitability when costs of production increase without raising prices. Cost-push inflation occurs when demand remains the same or increases and supply decreases.

  1. Production Costs – Increases in production costs will result in price increases. The main factors in production costs are labor and raw materials.
  2. Raw Material Costs – The cost of raw materials can be influenced by a number of factors such as the cost of labor to produce the materials and transportation costs to deliver materials to the point of production.
  3. Labor Costs – When aggregate labor costs increase as a result of higher wages or the cost of benefits – the cost of production will increase. When demand remains constant or increases these costs must be passed on in the form or higher prices.
  4. Supply Chain Issues – The supply chain refers to the process by which materials are moved from point to point through the production and distribution process. Disruptions or delays in the supply chain can result in a reduced supply of goods thus fueling cost-push inflation. This can be caused by factors such as reliance on other countries for materials and/or freight industry issues.

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