Cost-push
inflation is a relatively rare form compared with
demand-pull
inflation but, far more than
demand-pull inflation, it challenges the
conventional wisdom of
economics.
Cost-push inflation is a continued increase in prices caused by a substantial increase in the cost of manufacturing
goods. Usually,
technological advancement causes the
marginal cost of
goods and
services to fall over time, hence the relative
rarity of
cost-push
inflation. The most historically significant example of this phenomenon occurred during the mid 1950’s when
OPEC (the
Organization of Petroleum Exporting Countries) launched the first of several major oil
price hikes.
Unlike most forms of
inflation,
cost-push
inflation is generally accompanied by a
rise in unemployment. Remember that economic prosperity tends to generate
inflation, which is why
central banks cut their
interest rates to maintain
price stability.
Economic prosperity is also directly liked to
low unemployment. Understanding the particular implications of
cost-push
inflation is thus vital for understanding what could be an otherwise bewildering situation.