Cost push inflation is primarily caused by an increase in what?

Cost-push inflation occurs when the overall prices in an economy rise due to increases in the cost of production. This type of inflation is primarily driven by higher costs of inputs, such as labor costs and the prices of raw materials. When businesses face increased expenses for these essential inputs, they pass those costs onto consumers in the form of higher prices for goods and services.

For example, if the price of oil increases significantly, businesses reliant on oil for transportation and production may see a increase in their operational costs. To maintain their profit margins, these businesses will often increase the prices of their products, leading to inflationary pressures throughout the economy.

In contrast, consumer demand and government spending can influence demand-pull inflation by boosting the total demand for goods and services, while changes in interest rates typically affect borrowing and investment rather than direct input costs. By understanding the mechanisms behind cost-push inflation, it becomes clear how fluctuations in production costs significantly impact overall price levels.