Cost-push inflation occurs when the costs of goods and services increase, and those cost increases are not directly related to the increase in goods and services and their demand. Cost-push inflation is caused by factors that increase the cost of production and can include supply chain disruptions, wage increases, higher taxes and industrial actions such as strikes.

When prices increase, the cost of goods and services, as well as the availability of goods and services, become limited. This, in turn, results in an increase in prices of goods and services. This type of inflation is often referred to as ‘push’ or ‘cost-push.’

Cost-push inflation can have a cascading effect on other prices in the economy and can lead to stagnation in economic growth, as the cost of goods and services has outpaced the income. Higher prices lead to a chain reaction of price increases, as businesses are forced to raise the prices of their goods and services to maintain the same level of profit that they are accustomed to. This chain reaction can fuel a rise in prices across all markets, eventually leading to cost-push inflation.

Cost-push inflation weakens the position of households because, in addition to having to pay higher costs for goods and services, their purchasing power also decreases. This can cause people to become less willing to buy goods and services, resulting in a decrease in the demand for them.

Despite the potential to significantly reduce overall demand, cost-push inflation doesn’t automatically lead to an economic recession. If the government intervenes and raises the spending power of consumers, the economy can offset the cost-push inflation with increased demand for goods and services.

To prevent the economy from going into recession due to cost-push inflation, governments can increase the money supply and use fiscal policy to combat the impact of cost-push inflation. Governments can also intervene through monetary policy to reduce the rate of inflation by raising the key interest rate and allowing the markets to cool off.

Overall, cost-push inflation can lead to higher prices, lower output and a decrease in overall economic growth. It is for this reason that governments need to be vigilant and ready to respond to cost-push inflation quickly and effectively.