Cost-Push Inflation
Inflation caused by rising production costs that force prices higher while reducing economic output.
What is Cost-Push Inflation?
Cost-push inflation occurs when a rise in the costs of production — such as wages, raw materials, or energy prices — forces businesses to raise the prices of their goods and services. Unlike demand-pull inflation, cost-push inflation is driven by supply-side shocks rather than excess demand. It is particularly damaging because it simultaneously reduces economic output (higher costs depress production) and raises price levels, potentially leading to stagflation. Oil price shocks are the classic example: when crude prices spike, transportation and manufacturing costs rise across the entire economy, pushing up final goods prices even as consumer purchasing power is squeezed.
Example
The 1973 OPEC oil embargo quadrupled crude oil prices, dramatically raising production costs across industries. U.S. inflation surged from under 4% in 1972 to over 12% by 1974, while GDP growth turned negative — a classic episode of cost-push inflation leading to stagflation. The Federal Reserve's subsequent interest rate responses failed to address the supply-side origin of the problem.