What typically causes cost-push inflation?

Cost-push inflation is primarily caused by an increase in production costs, which directly affects the supply side of the economy. When the costs of inputs such as labor, raw materials, and energy rise, businesses face higher expenses to produce goods and services. As a result, to maintain their profit margins, these businesses may pass on the increased costs to consumers in the form of higher prices. This shift in the cost structure leads to an overall increase in the price level, characterizing cost-push inflation.

Understanding this concept is crucial because it highlights that inflation can occur not just from increased demand, but also from supply-side factors where rising costs make it more expensive to produce goods. This distinguishes it from demand-pull inflation, which occurs when demand exceeds supply, pushing prices up due to heightened consumer spending or investment. Recognizing the role of production costs in influencing inflation helps in analyzing macroeconomic conditions and formulating appropriate economic policies.