Cost-Push Inflation:
We may find a situation where even though there is no increase in aggregate demand, prices may still rise.
Cost-push inflation occurs when businesses respond to an increase in costs, by raising their prices to keep up their profit margins.
Costs might rise for many reasons including an increase in the prices of inputs, rising labor costs caused by wage increases that exceed improvements in productivity, higher indirect taxes the government imposes and a decline in the exchange rate.
Now, as the level of employment rises, the demand for workers rises progressively so that the bargaining condition of the workers increases. To take benefit of this situation, they demand for an increase in wages, which are not justifiable on grounds of an increase in productivity or a rise in living cost. The employers in a situation of high level of demand and employment conditions concede to these wage increases because they hope to pass on them to the consumers in the form of enhanced prices. If this happens another inflationary factor starts working. Besides, the increase in wages of labor without any increase in its productivity, there is another factor responsible for cost-push inflation.
We may find a situation where even though there is no increase in aggregate demand, prices may still rise.
Cost-push inflation occurs when businesses respond to an increase in costs, by raising their prices to keep up their profit margins.
Costs might rise for many reasons including an increase in the prices of inputs, rising labor costs caused by wage increases that exceed improvements in productivity, higher indirect taxes the government imposes and a decline in the exchange rate.
Now, as the level of employment rises, the demand for workers rises progressively so that the bargaining condition of the workers increases. To take benefit of this situation, they demand for an increase in wages, which are not justifiable on grounds of an increase in productivity or a rise in living cost. The employers in a situation of high level of demand and employment conditions concede to these wage increases because they hope to pass on them to the consumers in the form of enhanced prices. If this happens another inflationary factor starts working. Besides, the increase in wages of labor without any increase in its productivity, there is another factor responsible for cost-push inflation.
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