Cost Push Inflation

6 Key excerpts on "Cost Push Inflation"

• 

  eBook - PDF

  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Cost-Push Inflation Cost-push inflation is derived from a sharp rise in a key cost of firms. This produces a ‘supply side’ shock that results in an expectation of inflation that helps create a wage-price spiral, producing a long-lasting effect. The example most often quoted is the oil price shock of the 1970s, when the Organisation of the Petroleum Exporting Countries (OPEC) increased its prices 10-fold, creating widespread inflation in Inflation 105 Price level P ′ P Y (real output) AD AS ′ AS Y ′ Y Figure 4.6 Cost-push inflation as a result of OPEC increasing its prices 10-fold in the 1970s. AD, aggregate demand; AS, aggregate supply; Y, real output. Source: Own calculations. all oil-associated sectors and products. This is illustrated in Figure 4.6 where it is represented by a shift in the aggregate supply curve to the left, representing a rise in the price level, which then results in a real output decline. Not everyone agrees with this analysis, however. Monetarists argue that inflation became a problem because central banks ‘accommodated’ it by allowing money supply to rise in response. The argument against the concept of cost-push inflation is led by monetarist economists, such as Milton Friedman. Their argument cen-tres on the fact that increases in the cost of goods and services do not lead to inflation unless the government and its central bank cooperate in increasing the money supply. 2 The argument is that, if the money supply is constant, increases in the cost of a good or service will reduce the money available for other goods and services, and therefore the price of some of those goods will fall and offset the rise in price of those goods whose prices have increased. One consequence of this is that Monetarist economists do not believe that the rise in the cost of oil was a direct cause of the inflation of the 1970s.

  Sign up to read

  Learn more about book
• 

  No longer available |Learn more

  Textbook of Macroeconomics

  • (Author)
  • 2014(Publication Date)
  • White Word Publications

    (Publisher)

  There are three major types of inflation, as part of what Robert J. Gordon calls the triangle model: • Demand-pull inflation is caused by increases in aggregate demand due to increa-sed private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. • Cost-push inflation , also called supply shock inflation, is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. • Built-in inflation is induced by adaptive expectations, and is often linked to the price/wage spiral. It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation. Demand-pull theory states that the rate of inflation accelerates whenever aggregate demand is increased beyond the ability of the economy to produce (its potential output). Hence, any factor that increases aggregate demand can cause inflation. However, in the long run, aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy. Another (although much less common) cause can be a rapid decline in the demand for money, as happened in Europe during the Black Death, or in the Japanese occupied territories just before the defeat of Japan in 1945.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Macroeconomic Systems

  • Krish Bhaskar, David F. Murray(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  There are two further problems which we must mention here. Inflation is generally considered to be undesirable yet an annual increase in the general level of prices of, say, 1.5 per cent may be argued by some economists to be beneficial in stimulating economic growth whereas they would join the consensus of opinion against a 25 per cent per annum rise. The problem of deciding when the rate of increase in prices becomes unacceptable therefore remains. Secondly, a distinction is often made between price inflation which refers to the rate of increase of prices and wage inflation which refers to the rate of increase of money wages. Inflation is normally measured by the rate of increase of prices, although clearly wages and prices are closely related.

  Demand pull and Cost Push Inflation

  The models considered earlier in the book have generally assumed a downward sloping aggregate demand curve and an upward sloping aggregate supply curve which provides a convenient framework within which to consider the two main ways in which price inflation may occur.

  The first is generally known as demand pull inflation and reflects a rightward shift in the aggregate demand curve as shown in Figure 15.1 . It is often loosely described as a situation where ‘too much money is chasing too few goods’ and is simply a situation where the demand for goods and services at the existing price level outweighs the supply, leading to an increase in the price level.

  Figure 15.1 The effect on the price level of an increase in aggregate demand

  It is often argued that at less than full employment the aggregate supply curve is similar to that shown in Figure 15.1 but that as full employment is reached output cannot easily be increased, in the short run at least, and the aggregate supply curve becomes steeper as shown3 by the dotted line in Figure 15.1 . The effect of this is to generate a greater increase in the price level for a given movement in the aggregate demand curve.

  One source of theories of inflation is therefore concerned with the factors affecting the aggregate demand curve since this in turn affects the price level. These are the so-called demand pull theories. The second main approach to the theory of inflation is generally known as Cost Push Inflation and considers the factors which might produce a leftward shift in the aggregate supply curve as shown in Figure 15.2

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Collective Bargaining

  Survival in the '7s?

  • Richard L. Rowan(Author)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  We should have learned from the 1960-65 experience that infla-tion can be contained while improving the real wage earned by people in their functions as consumers, producers, and taxpayers. For the Price Commission then, the job is to identify and to implement vigorously measures which will achieve the Presi-dent's objective of an inflation rate of 2 to 3 percent by the end of 1972. For the Pay Board, the job is to move courageously and relentlessly to bring pay increases—whether newly-negotiated or deferred—back to the levels which the productivity of our econ-omy can support. As Arthur Burns has warned: The rules of economics are not working in quite the way they used to. Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capa-city, commodity prices continue to rise rapidly. And the experience of other industrial countries, particularly Canada and Great Brit-ain, shouts warnings that even a long stretch of high and rising unemployment may not suffice to check the inflationary process. . . . The problem of cost-push inflation in which escalated wages lead to escalated prices in a never ending circle is the most difficult eco-nomic issue of our time* (Emphasis added.) The compelling determinatives of Phase I—wage-push infla-tion and foreign competition—are the inescapable constraints of Management Responsibility for Collective Bargaining 475 Phase II. Any attempt to escape these constraints—or to loosen them for some fleeting comfort—would be to trifle unconscion-ably with the jobs of American workers, and the standard of living of the American people. Let me attempt to summarize the points which I and my col-leagues on the business group of the Pay Board feel are crucial to an understanding of the situation facing the U.S. economy. —What had started out as a demand-pull inflation with the Vietnam escalation had become a cost-push inflation.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Engineer's Cost Handbook

  Tools for Managing Project Costs

  • Richard E. Westney(Author)
  • 1997(Publication Date)
  • CRC Press

    (Publisher)

  Secondly although firms would like to raise prices they hesitate to do so unless other firms move first; third, that prices are based on costs and do not rise until costs rise. Of the ten theories for sticky prices, judging quality by price is the worst: few firms believe that if they lower prices it will be interpreted as a lowering of quality (Blinder, 1993). N. THE IMPACT In this paper we discuss the impact of inflation and escalation on any of the parties to a project; contingency and profit, discussed below, may be more Estimating the Cost of Escalation 243 applicable to the contractor, but we will treat these as costs to whomever shares the risks. We are most concerned with the impact that price or cost inflation can cause in the prices of commodities in projects, In this paper “commodities” means direct or indirect materials, labor, and equipment. We are also con- cerned with the range of costs classified as general and administrative and, of course profit. A. Material Costs Anticipating probable increases in prices of materials, users can either resort to stockpiling or hedging against future needs or they can seek to protect themselves through escalation clauses. As long as the government does not interfere with the process of obtaining and pricing materials escalation clauses have been effective in low inflationary situations. Government price controls cause shortages and are a barrier to the decline in prices that may occur when supplies become more readily available. Scarcity of materials can lead to stockpiling and to very long lead times, such as those that occurred in the U.S.A. in the early 1970s. In some countries government controls have led to black marketing, with secondary markets causing even more price dis- tortion. B. Labor Costs Labor costs are also based on supply and demand but, in addition, wages are a function of the perception of workers and unions as to whether there will be further increases in the overall economy.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Macroeconomics for Managers

  • Michael K. Evans(Author)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Also, the CPI fell by almost 50% between 1865 and 1900. Admittedly it had been temporarily boosted during the Civil War, but even from 1875 through 1900 it fell at an average of about 1% per year. The gold standard and cheap immigrant labor combined to reduce prices. During the Great Depression of the 1930s, prices did rise somewhat, but most of the attention was understandably focused on the unacceptably high rate of unem- ployment, and inflation was almost ignored. In the aftermath of the double-digit inflation that occurred directly after World War II – when the inflation rate rose as high as 18% in 1946 – most economists quickly changed their emphasis, and standard economics texts of the time focused on the difference between ‘‘demand- pull’’ and ‘‘cost-push’’ inflation. Demand-pull inflation, it was said, occurred when the economy was at full employment and full capacity – ‘‘too many dollars chas- ing too few goods.’’ Cost-push inflation, on the other hand, allegedly occurred when wage rates rose faster than productivity even during times of relatively high unemployment. With the onset of what economists dubbed ‘‘stagflation’’ in the early 1970s – high and rising inflation simultaneously with high and rising unemployment – this artificial distinction collapsed. It was replaced in part by the introduction of rational expectations, and in part by a dichotomy between the short-run and long-run determinants of inflation. In the short run, it was argued, inflation did tend to rise near full employment and full capacity, but in the long run, the growth rate of the economy had no impact on the rate of inflation, which was entirely a monetary phenomenon. That would explain, for example, why countries such as Germany and Japan had little inflation in the decades following World War II, while countries such as Brazil and Argentina regularly succumbed to triple-digit inflation.

  Sign up to read

  Learn more about book