Question

When overall price increases due to increase in the cost of wages and raw materials, the result is

• A. Demand-pull Inflation
• B. Stagflation
• C. Cost-push Inflation
• D. Hyper Inflation

Answer 1

Answer:

C. Cost-push Inflation

• Definition: This phenomenon occurs when the total supply of goods and services in an economy decreases due to rising production costs, leading to a general increase in price levels.
• Primary Triggers: The two most significant drivers are rising wages (labor costs) and increased prices of raw materials (input costs), which force producers to raise prices to maintain profit margins.
• Key Economic Concept: It is often described as 'supply-side inflation' because it originates from the production side of the economy, unlike 'Demand-pull inflation' which is driven by an excess of aggregate demand.
• Wage-Price Spiral: This is a critical related concept where workers demand higher wages to keep up with rising costs of living, which in turn leads businesses to further increase prices, creating a continuous cycle of inflation.
• Impact on Economy: Unlike demand-pull inflation which is often associated with economic growth, cost-push inflation can lead to Stagflation—a condition characterized by stagnant economic growth, high unemployment, and high inflation.
• Supply Chain Shocks: External factors such as a sudden rise in global crude oil prices or shortages of critical components can trigger this type of inflation, as seen in various historical global economic crises.
• Policy Implications: Controlling this type of inflation is often challenging for Central Banks (such as the RBI) because increasing interest rates to curb demand may exacerbate the economic slowdown caused by high production costs.