Cost-Push Inflation

Cost-push inflation is also known as Cost Inflation. It basically arises due to a rise in wage rates, which in modern economic conditions, are affected somewhat frequently due to pressure from labour unions. Interaction between demand for and supply of labour is no longer the only factor responsible for the determination of wage rates. That way we can say that wages rates these days are somewhat 'administered'.

Normally wage rate should increase only when there is excess demand for labour. Collective bargaining, through labour unions, is often responsible for a hike in wage rate, which has no relationship with the demand for labour exceeding supply. This way when the employers are forced to increase wages, their cost of production also increases. They cannot supply the finished goods at previous prices. Unable to curtail production, for which there may not be any apparent reason, producers and left only with the option of increasing the market price of the commodity.

It is very difficult to control this type of inflation through Fiscal and monetary policies. Through restrictive monetary and fiscal policies the aggregate demand can be brought down, which will bring down the price. But that affects economic growth, as production and investment gets curtailed and unemployment is created. Basically producers' profit is caught between restrictive monetary and fiscal policies on one side, and pressure for higher wages from labour unions on the other. Ultimately an understanding between employers and unions ascertain a stable wage rate that can drive out the inflationary price rise, where unions are faced with further unemployment, and producers are faced with reduced profits, both due to curtailed production.

Mixed Demand-Cost Inflation

Inflation may arise without an increase in general aggregate demand. Under a condition of full-employment, if there is an increase for a particular class of goods in the product or commodity market, it will push up the prices of that class of goods. This will induce producers to produce more of that particular class of goods. So more labourers or workers will be employed at a higher wage rate, as there is no idle labour force in the labour market. This may induce labourers in other industries to go for a wage hike as well, though there is no extra demand for labour in those industries. This way market prices of commodities will eventually go up due to increase in cost of production.

Also read: Inflation and Deflation Demand-Pull Inflation Effects of Inflation