Economics – Government and the macroeconomy - Inflation | e-Consult
Government and the macroeconomy - Inflation (1 questions)
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Cost-push inflation occurs when the costs of production for businesses increase, leading them to raise prices to maintain profitability. This is in contrast to demand-pull inflation, which is driven by increased aggregate demand. Here are some key causes of cost-push inflation:
- Increase in wages: If wages rise significantly without a corresponding increase in productivity, businesses face higher labour costs. They may pass these costs on to consumers through higher prices.
- Increase in the price of raw materials: A rise in the cost of essential raw materials (e.g., oil, metals, agricultural products) directly increases the cost of production for many industries. This often leads to price increases.
- Increase in import costs: If the price of imported components or materials rises (due to exchange rate fluctuations or increased demand from other countries), businesses face higher input costs. These costs are often passed on to consumers.
- Supply Chain Disruptions: Disruptions to supply chains, such as those experienced during the COVID-19 pandemic, can lead to shortages of materials and components. This scarcity drives up prices.
- Increased taxes and levies: Higher taxes on businesses, such as corporation tax or VAT, increase their overall costs and can be passed on to consumers.
These factors can interact and reinforce each other, leading to a sustained period of inflation. The impact of each factor can vary depending on the specific industry and economic conditions.