What characterizes cost-push inflation?

Cost-push inflation is primarily characterized by higher production costs that lead to a decrease in supply of goods and services. When the costs of production increase—whether due to rising wages, increased prices for raw materials, or new regulations—firms may find it more expensive to produce the same quantity of goods. As costs rise, businesses may cut back on their output because they cannot sustain production at previous levels without passing those costs onto consumers. This reduction in supply, while demand remains constant, typically leads to higher prices—hence the term "cost-push" inflation.

Understanding this concept is crucial, as it differentiates cost-push inflation from demand-pull inflation, which occurs when demand for goods and services exceeds supply. In the context of the choices provided, recognizing that increased production costs can lead both to decreased supply and higher prices is essential for grasping the dynamics of inflation in an economy.