Cost-Push Inflation using AD-AS Diagram Cost-push inflation occurs when firms respond to rising GPL AS2 costs by increasing their prices AS1 to protect profit margins GPL2 Can be caused by: 1.Rising unit labour costs 2.Higher prices for GPL1 important components/raw materials 3. A depreciation in the exchange rate causing a rise in import costs 4.An increase in business AD taxes e.g.VAT or environmental taxes such as a carbon tax Y2 Y1 Real GDP
Cost-push inflation can be caused by many factors ▣(l)Rising wages If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms.(higher wages may al so contribute to rising demand)
(1) Rising wages If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand) Cost-push inflation can be caused by many factors
(2)A fall in the exchange rate If there is a devaluation of one country's currency,it can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials,components and finished products.A devaluation depreciation means the RMB is worth less. Therefore we have to pay more to buy the same imported goods UK Inflation ·
If there is a devaluation of one country's currency, it can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials, components and finished products.A devaluation / depreciation means the RMB is worth less. Therefore we have to pay more to buy the same imported goods. (2) A fall in the exchange rate
(3)Raw material prices such as oil,copper and agricultural products used in food processing. The best example is the price of oil.If the oil price increase by 20%then this will have a significant impact on most goods in the economy and this will lead to cost-push inflation.E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the wor Id
such as oil, copper and agricultural products used in food processing. The best example is the price of oil. If the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost-push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world. (3) Raw material prices
US and Euro area Inflation US Euro area SSSSSFFSFSFSESS 2 www.economicshelp.org I Source:World Bank Source:World Bank.In 2008,we had a smaller spike in oil prices causing a rise in inflation-just before the great recession of 2008/09