This refers to the persistent increase in the general price level of goods and services brought about by the rising costs of production.
When costs of production increase, producers respond by increasing the prices of final goods and services that they produce in order to cover up the increasing costs.
Causes of cost push inflation.
- Rising wages/ increase in wages. This results into wage push inflation.
NB: wage push inflation refers to the persistent increase in general price levels of goods and services brought by increase in wages. As the workers demand for higher wages , the producers after granting the higher wages , inevitably have to increase the prices of their products.
Cost push inflation usually occurs in form of an inflationary spiral which Is a situation where a persistent increase in the price level results into demand for higher wages by the workers which increases the production costs hence resulting into rise in prices.
- Rising/increasing interest rates on capital / borrowed money. Increase in the interest rates charged on loans by commercial banks results into an increase in prices of final products.
- Rising transport costs. This arises due to increasing fuel prices which causes an increase in the cost of transporting the goods.
- Increasing prices of raw materials especially those that are used as inputs in production of final goods and services .This at times is used by rising indirect taxes on those raw materials.
- Rising rates of taxation on the producers. This also increases the production costs and prices of final goods and services.
- Rising costs of advertisement .this also increases the production costs which results into increase in the prices of final products.
This can be controlled by measures that control/ reduce the production costs. e.g. Provide tax incentives to the producer e.g. tax holidays and tax reductions
- Develop/ improve the country’s infrastructure especially the transport system which reduces the transport costs.
- Subsidize producers
- Wage control methods which limits/ increase wages e.g. wage freeze and wage restraint.
- Reduce interest rate on loans advanced by commercial banks.
- Reduce indirect taxes levied on individual raw materials and spare
This refers to the persistent increase in the general price level of goods and services brought about by supply rigidities in an economy.
Supply rigidities refer to the factors that hinder or prevent smooth production of goods and services leading to shortages in an economy and consequently resulting into increased prices.
An example of supply rigidities is breakdown of infrastructure where supply of goods cannot be increased to desired levels. Shortage of goods arises on the market and prices finally increase.
Causes of structural inflation.
- Political instability. This hinders smooth production of goods and services which brings about shortages and rising prices in the market.
- Natural hazards / unfavorable natural factors. This hinders production especially in the agricultural sector resulting into shortages and rising prices.
- Breakdown of the country’s infrastructure .this hinders production and also causes delays in distribution of commodities to the market causing shortages in different areas and hence rising prices of goods.
- Scarcity /shortage of inputs/raw materials. This also hinders smooth production of goods and services thereby leading to shortages and rising prices.
- Speculation by business people through hoarding of commodities which results into shortages hence causing inflation.
This can be controlled by policies / measures which increase production of goods and services after removing all the bottlenecks or supply rigidities that hinder production.ie
- Improve political climate
- Develop the country’s infrastructure
- Liberalize trade
- Modernize agriculture which reduces dependence on natural factors provide capital to facilitate production
1a) Distinguish between cost push and bottle neck inflation.
b) Mention two causes of bottleneck inflation.
This is the persistent increase in the general price level of goods and services that results from importation of commodities from countries experiencing inflation. This happens if the imported products are used as inputs but also happens when the imported goods are final goods
When such goods are brought into the country , the importers have to sell them expensively thereby creating imported inflation.
Causes of imported inflation.
- Importation of commodities from countries experiencing inflation.
- Importation of commodities whose prices are rising on the international market.
- Depreciation of country’s currency.
This can be controlled;
- Encouraging importation from cheaper sources
- Establish import substitution industries to start producing those commodities that were originally imported from countries facing inflation
- Subsidize the importers
- Use of trade restrictions to discourage importation of commodities from countries experiencing inflation.
Profit push inflation.
This refers to a persistent increase in the general price level of goods and services that arise when the business people increase the prices of final goods in order to make more profits.
It is mainly brought about by the greed of the business people for higher profits.