Cost-push inflation is an economic concept, a type of inflation driven by supply-side factors, where the general price level of goods and services rises due to an increase in the costs of production. The concept emerged after World War II to explain price increases caused by labor unions pushing up wages despite high unemployment. It was revived in the 1950s and 1970s as the "New Inflation" to describe any significant upward shift in supply schedules.
The mechanism works when escalating production costs, such as higher wages, increased raw material prices, or energy costs, force businesses to raise the prices of their output to protect profit margins. In the Aggregate Supply–Aggregate Demand model, this is represented by the short-run aggregate supply curve shifting to the left. This shift results in a higher price level but a lower real GDP (output), a phenomenon that can lead to stagflation—the combination of rising prices and stagnant economic growth. A classic historical example is the 1970s oil crisis, where the Organization of Petroleum Exporting Countries (OPEC) increased petroleum costs, causing widespread cost-push inflation.
Cost-push inflation is fundamentally contrasted with demand-pull inflation, which is caused by excessive aggregate demand. An informed reader should also know that cost-push pressures can trigger a wage-price spiral, where workers demand higher wages to compensate for rising prices, which further increases production costs and leads to subsequent price hikes. Recently, supply-side factors like global supply chain disruptions during the COVID-19 pandemic and commodity price pressures from the Russia-Ukraine conflict in 2022 have been major drivers. In the Indian context, supply-side factors accounted for approximately 55% of the Consumer Price Index (CPI) headline inflation between January 2019 and May 2023.