MacroeconomicsI_working_version (1)

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Chapter 9
9.3.2. Cost-Push Inflation
Demand-pull inflation was often used by the classical economists to explain the historical
price movements. However, the inflation process changed during last century. Nowadays
we may experience the significant rise in wages and prices even if potential output is not
reached. Such type of inflation resulting from rising costs during periods of high
unemployment and weakly used resources is known as cost-push or supply-shock inflation.
A typical example of cost-push inflation is an oil-shock referring to rapid increase in prices
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of oil or other inputs.
Figure 9.2 Cost-push inflation. This type of inflation occurs when aggregate supply decreases. The rise in
the price level is accompanied with a decline in output. The situation of rising inflation and increasing
unemployment is called stagflation.
Demand inflation occurs when aggregate spending exceeds the economy’s ability to
supply goods and services at the existing price level. Aggregate spending pulls up the price
level.
Cost-push inflation occurs when a rapid rise in prices of inputs (increases in wages, prices
of raw materials, oil etc.) push up per-unit production costs. Higher costs push up the price
level.
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