What are the Causes of Cost Push Inflation?

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There are essentially three causes of cost-push inĀ­flation:

(a) wage-push due to union monopoly power,

(b) Profit-push due to business monopoly power, and

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(c) Increasing raw material prices.

Accordingly, cost- push inflation can take the forms of wage-push or profit- push or material-push inflation.

1. Wage-Push Inflation:

Wage-Push has been considered the main determinant of cost-push inflation because, in the modern times, the trade unions have become very strong and they succeed securing higher wages for their members.

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This increases the cost of production and, to maximise their profits, the businessmen raise the prices of their products. Critics of wage-push inflation theory put forward the arguments against wage rise as a sufficient and independent cause of inflation.

(i) In a number of cases, wage increases are not autonomous, but are induced by the operation of demand-pull factors. For example:

(a) Wage rise may be induced by an excess demand for labour, which may be the result of excess demand conditions in the commodity market,

(b) Wage rise may be induced by an increase in the cost of living. Such wage rise is the result and not the cause of inflation,

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(c) Wage rise may be induced by increases in the productivity. Such wage rise is price stabilizing rather than inflationary.

(ii) For wage-push inflation to occur, it is necessary that trade unions have substantial control over the supply of labour. In a country like India, where the major portion of the labour force is not unionised, trade unions do not have much influence on wages,

(iii) Even in countries where trade unions are strong, their wage demands are not totally independent of demand conditions and are influenced positively by the level and growth of employment as well as profits.

To, conclude, there is general agreement to the view that only the wage increases in excess of increases in the labour productivity can be an autonomous cause of wage-push inflation.

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Thus, the rate of inflation (p), according to the wage-push inflation theory, is determined by the excess of rate of wage increase (w) over the rate of increases in labour productivity (x). Symbolically, p = w – x.

2. Profit-Push Inflation:

Cost-push inflation also occurs when the monopoly power of the businesses enables them to raise prices to increase their profits.

Once started by a few powerful firms, the smaller firms also tend to mark-up their profit margins, partly following the example of leading firms and partly through inter-industry relations, because their material costs have gone up. This kind of price increase is called profit-profit spiral.

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3. Material-Push Inflation:

Cost-push inflation is also caused by increase in the prices of some key materials, such as steel, basic chemicals, oil, etc.

Since, these materials are used, directly or indirectly, in almost all the industries, the increases in their prices affect the whole of the economy and the prices everywhere tend to increase.

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