Cost-push inflation

Overview

Cost-push inflation and unit labour costs.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Define cost-push inflation.

   Model answer

   Cost-push inflation arises when firms' costs of production rise and are passed on in prices. Cost-push inflation raises prices without any rise in demand.

2. 2

   Describe what happens on an AD/AS diagram during cost-push inflation.

   Model answer

   An AD/AS diagram plots the price level on the vertical axis against real output on the horizontal axis. Short run aggregate supply shifts left, so the price level rises while real output falls.

3. 3

   Name three causes of cost-push inflation.

   Model answer

   A rise in oil prices, a rise in wages above productivity and a fall in the exchange rate each raise firms' costs. All three are passed on as higher prices.

4. 4

   How does a rise in world oil prices cause cost-push inflation?

   Model answer

   Oil is an input into transport, heating and manufacturing across the whole economy. Higher oil prices therefore raise costs and prices in almost every sector.

5. 5

   How can a fall in the exchange rate cause cost-push inflation?

   Model answer

   A weaker pound raises the sterling price of imported raw materials and components. Firms facing dearer imports pass the cost into their selling prices.

6. 6

   Why does a wage rise above productivity growth cause inflation?

   Model answer

   Unit labour costs rise whenever pay grows faster than output per worker. Firms restore their profit margins by raising prices.

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