Last week, I talked about the first kind of inflation, demand-pull inflation. Demand-pull inflation is centered around demand by consumers outpacing the supply available, which leads to an overall increase in prices (inflation). This represents just one variation of inflation, and in today’s article, I’ll be discussing cost-push inflation, another variation.
To quickly summarize, inflation is a decrease in purchasing power, meaning one dollar will be able to buy less and less as time passes. Inflation has been present throughout recent history, and will likely remain present for years to come. Inflation has many causes, some of which I’ve discussed when exploring demand-pull inflation, and some of which I’ll explore today.
With that, let's dive into cost-push inflation. Unlike demand-pull inflation, which revolves around, well, demand, cost-push inflation revolves around increasing costs (neither of those explanations was very surprising). Specifically, the costs for means of production, like factories, resources, and wages, have increased. This means producing goods and providing services becomes more expensive for companies (they have to spend more to purchase items to produce their goods).
Because companies are paying more to produce the same amount of goods, their profits are decreasing. In order to prevent this decrease in profits, companies raise the prices of their goods, effectively passing on increased expenses to the consumer. As the general price of goods is raised, inflation is setting in.
So, why does cost-push inflation occur? Well, it occurs because costs of production rise. This means things like materials and wages become more costly, more commonly the former.
Why do materials rise in price? Materials can increase in price for a number of reasons. I’ll first explore raw materials and then explore synthetic materials.
Most raw materials can rise in price for a few reasons, most commonly due to disasters, both natural and not. For example, if a major offshore oil rig explodes, oil has become more scarce, at least in the short term. Similarly, if a copper mine collapses, copper prices are likely to rise.
A similar concept applies to synthetic materials. If there are major chip production plants in one region of China, and workers decide to strike, there will likely be a chip shortage, leading to an increase in chip prices. A real-world example of this is currently occurring: due to Covid-19, many chip production factories were shut down, leading to a massive shortage. This was accompanied by an increase in the price of many goods, namely cars.
In all of these instances, a certain key material has become rarer, causing its price to rise. This leads to the production of goods that include a specific material to become more expensive, with that additional expense being reflected in an increase in price of the final good, which is, in short, inflation.
I hope this article explains cost-push inflation well, please feel free to contact me at financeforteens.org@gmail.com with any further questions, and thank you for reading!