Cost Push Inflation On The Prices - 1101 Words

Cost-push inflation further occurs when businesses respond to rising costs, by increasing their prices to protect profit margins. There are many reasons why costs might rise. Some of these reasons are: ïÆ' ¼ Component costs: e.g. an increase in the prices of raw materials and components. This might be because of a rise in global commodity prices such as oil, gas copper and agricultural products used in food processing – a good recent example is the surge in the world price of wheat. ïÆ' ¼ A fall in the exchange rate – this can cause cost push inflation because it normally leads to an increase in the prices of imported products. For example during 2007-08 the pound fell heavily against the Euro leading to a jump in the prices of imported materials from Euro Zone countries. Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve. The fall in SRAS causes a contraction of GDP together with a rise in the level of prices. One of the risks of cost-push inflation is that it can lead to stagflation. Important note: Many of the causes of cost-push inflation come from external economic shocks – e.g. unexpected volatility in the prices of internationally traded commodities and large-scale movements in variables such as the exchange rate. A country can also import cost-push inflation from another country that is suffering from rising inflation of its own. ïÆ'Ëœ Demand-pull Inflation This is a kind of inflation which is as a result of a persistent increase inShow MoreRelated The Causes of Inflation Essay1116 Words   |  5 PagesCauses of Inflation There are three major causes of inflation: 1. Demand - pull inflation 2. Cost - push inflation 3. Monetarist Theory 1. Demand - Pull Inflation ========================== This type of inflation is caused by excess aggregate demand, exceeding aggregate supply. Quite simply too much demand is chasing too few goods. 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