Write brief note on Cost-push Inflation and its elements

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A cost-push inflation is the one in which price rise is initiated and sustained by increasing prices of inputs or similar other causes. In economic theory, an increase in money rates is mentioned as the main reason of an increase in production costs. It is also asserted that inflation results when wages increase faster than the increase in labor productivity. Granting that this is so, it should be noted that money wages can outstrip labor productivity only if

Elements

1. (i) Labor unions are strong enough to achieve this kind of wage revision, or

(ii) The authorities intervene and provide a legal basis for compulsory wage revision (such the law prescribing a minimum wage)

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It means that, in both cases, the labor market is rendered non-competitive. In this connection, we should also note that

i. Cost of production can increase not only on account of an imperfect labor market, but also imperfect markets for other domestic inputs.

ii. The increase in ‘cost of production’ can take place on account of an increase in prices of imported inputs as well. These imported inputs may include not only raw materials, but also machinery, equipment, means of transport and technology. Similarly, an increase in freight rates .payable on imports can lead to an increase in production costs.

iii. It is also possible that prices of imported inputs will go up because of imposition of quantitative restrictions by the domestic government or by the governments of the exporting countries. Similarly, a revision of customs duties by the concerned governments may also push up input costs.

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2. It is possible that there is a sudden reduction in the availability of some essential mineral product or an increase in its price due to monopolistic forces. Such like happenings can also add to the production costs of a wide range of products. An example of such monopolistic forces is the collusion between exporter countries of petroleum products.

3. Supplies of several essential items can decrease during periods of wars and natural calamities. During aware for example, the economy starts deliberately diverting some of its productive resources for the purpose of defense. These resources are just consumed up without effectively adding to the available supplies. The prices of such resources tend to go up.

4. Indirect taxation has the characteristic of directly adding to the cost of supplying, he impact of indirect taxes on the prices of taxed goods depends upon the elasticity of their demand and supply. Examples of prominent indirect taxes include sales taxes, excise duties, customs duties, and duties on storage and so on. It should be noted that the manner of imposing indirect taxes also affects the cost of supply. In case of value added tax, for example, the tax collected tends to be a prescribed percentage of the prices of final consumption goods. On the other hand, a multi-point indirect tax tends to create a ‘cascading’ effect on cost and prices. This is because in this system, taxes become payable even on taxes paid earlier.

5. If the market is sufficiently competitive, then inflation can take place only through in increase in cost. This necessitates that while the product markets are truly competitive, inputs markets are monopolistic in nature. On the other hand, if input market is competitive and product market is monopolistic, then inflation can take place only through excess demand.

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Investigations into the phenomenon of cost-push inflation have along history, but they gained popularity in 1950s and later. During this period, the imperfections of the market were accorded a growing recognition. Now it is recognized that the sellers can exploit the market imperfections and push up prices even in the face of issue agent demand. The only condition is that the elasticity of demand should be less than one. In other words, what is termed by sellers, as cost-push inflation may in fact be a result of their deliberate action to exploit the market situation? For this reason, it is also variously termed as the “sellers inflation”, “mark up inflation”, “administered price inflation”, “income-sharers’ inflation”, etc.

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