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.

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