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Line 1: {{Refimprove\|date=July 2010}} [[Image:As AD cost push.svg\|thumb\|283px\|[[AD-AS model\|Aggregate supply – aggregate demand model]] illustration of aggregate supply (AS) shifting to AS' and causing price level to increase while output shrinks]] '''Cost-push inflation''' is a type of [[inflation]] caused by substantial increases in the cost of important [[~~goods~~good (economics)\|goods]] or services where no suitable alternative is available. A situation that has been often cited of this was the [[1973 oil crisis\|oil crisis]] of the 1970s, which some economists see as a major cause of the inflation experienced in the [[Western world]] in that decade. It is argued that this inflation resulted from increases in the cost of [[petroleum]] imposed by the member states of [[OPEC]]. Since petroleum is so important to industrialised economies, a large increase in its price can lead to the increase in the price of most products, raising the [[inflation rate]]. This can raise the normal or [[built-in inflation]] rate, reflecting [[adaptive expectations]] and the [[price/wage spiral]], so that a [[supply shock]] can have persistent effects. [[monetarism\|Monetarist]] economists such as [[Milton Friedman]] argue against the concept of cost-push inflation because increases in the cost of goods and services do not lead to inflation without the government and its [[central bank]] cooperating in increasing the [[money supply]]. The argument is that if the money supply is constant, increases in the cost of a good or service will decrease the money available for other goods and services, and therefore the price of some those goods will fall and offset the rise in price of those goods whose prices have increased. One consequence of this is that monetarist economists do not believe that the rise in the cost of oil was a direct cause of the inflation of the 1970s. They argue that although the price of oil went back down in the 1980s, there was no corresponding [[deflation (economics)\|deflation]].

Cost-push inflation: Difference between revisions