What is cost-push inflation?

Cost-push inflation refers to the increase in prices that occurs when the overall costs of production rise, leading to a decrease in the supply of goods and services. When production costs increase—due to rising wages, higher prices for raw materials, or increased taxes, for instance—producers may pass these costs onto consumers in the form of higher prices to maintain profit margins. This type of inflation is distinguished from demand-pull inflation, which occurs when demand within the economy exceeds the available supply, driving prices up as consumers compete for limited goods.

Understanding cost-push inflation is essential because it highlights how external factors, such as changes in the supply chain or labor market, directly impact overall economic conditions. In contrast, the other options refer to different types of inflation mechanisms that do not focus primarily on production costs, such as demand-driven price increases, government spending effects, or shifts in consumer preferences.