cost-push inflation
Imagine a bakery whose flour supplier suddenly triples its prices, while the cost of fuel for the ovens and delivery vans also jumps. The bakery has not sold a single extra loaf — demand is unchanged — but to keep its doors open it must raise prices. Now imagine that happening to bakeries, factories, and shops everywhere at once because a key input got expensive. Prices rise economy-wide even though no one is buying more. That is cost-push inflation.
Cost-push inflation occurs when the costs of production rise, pushing the general price level up even without extra demand. The trigger is usually a supply shock: a spike in oil or energy prices, a poor harvest, broken supply chains, higher import costs from a weaker currency, or sharply rising wages not matched by productivity. Firms facing higher costs pass them on as higher prices, so output may stall or fall even as prices climb — the unpleasant signature of cost-push inflation.
Cost-push inflation is harder for policymakers to fight than demand-pull, because the usual cure — raising interest rates to cool demand — does nothing about the underlying supply problem and can deepen the slowdown. This is the recipe for stagflation: rising prices and stagnant output together, as in the oil shocks of the 1970s. The honest caveat again: pure cost-push is rare. If a one-off cost spike feeds into wage and price expectations, it can morph into a broader, self-sustaining inflation.
When global oil prices quadrupled in the 1970s, the cost of fuel, plastics, fertiliser, and transport rose for nearly every business at once. Companies raised prices to survive, so inflation jumped even as economies slowed — a textbook cost-push shock.
A spike in a key input like oil pushes up prices everywhere at once.
Raising interest rates fights demand-pull inflation but does little against a genuine cost-push (supply) shock, and can push the economy toward stagflation — high prices plus stagnant output.