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A free scan shows the junk files, broken settings and background clutter dragging Windows down - then fixes them in one click.Free scan · Windows 10 & 11Cost-push inflation is upward pressure on the general price level that starts when production costs rise or supply is constrained. Businesses may pass higher costs per unit of output on to customers. If the shock is large enough, prices can rise even as production and economic activity weaken.
What is cost-push inflation?
Inflation is a sustained rise in the general price level—not simply a higher price for one product. Cost-push inflation describes a supply-side mechanism: an increase in the cost of making goods and services, or a constraint on their supply, puts upward pressure on prices. The Reserve Bank of Australia (RBA) and the Federal Reserve Bank of Cleveland explain that firms may respond to higher per-unit costs by raising prices.
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A price increase does not automatically mean inflation. If the price of one good rises while the prices of other goods do not, that may be a relative-price change. The term inflation applies when the general price level rises persistently.
What causes cost-push inflation?
Energy and raw materials
Oil, energy, and other commodity prices feed into the costs of producing and transporting goods and providing services. When those inputs become more expensive, businesses that rely on them may raise prices. Food commodity price increases can work similarly.
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Wages growing faster than productivity
Higher wages can raise firms’ labor costs, but wage growth does not automatically cause inflation. The relevant question is how wages change relative to labor productivity. If workers produce more per hour, some wage growth can be absorbed without increasing the labor cost per unit of output. Wage increases that outpace productivity are more likely to add to per-unit costs and put upward pressure on prices, the RBA explains.
Disruptions that constrain supply
Conflict, embargoes, natural disasters, pandemics, supply-chain interruptions, drought, and severe weather can interrupt production or make key inputs harder to obtain. Agricultural disruptions, for example, can reduce food supply or raise the costs of producing it. A disruption can therefore push prices up even when consumer demand has not strengthened.
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How cost-push differs from demand-pull inflation
The distinction is about what starts the pressure. Cost-push inflation begins with higher production costs or constrained supply. Demand-pull inflation begins when aggregate demand grows faster than the economy can supply goods and services.
| Feature | Cost-push inflation | Demand-pull inflation |
|---|---|---|
| Starting point | Rising input costs or an adverse supply constraint | Stronger aggregate demand relative to available supply |
| Possible output effect | A supply shock can raise prices while reducing production | The Cleveland Fed’s demand-pull example raises both prices and output |
| What can make it persist | The shock’s breadth, scale, and duration, as well as expectations and wage- and price-setting | Demand pressure and the way expectations and price-setting respond |
These are useful ways to analyze inflation, not mutually exclusive labels for every episode. Supply and demand forces can operate at once, and it can be difficult to identify their relative importance while events are unfolding.
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Examples: from the 1970s oil shock to 2026
The 1973 oil embargo and stagflation
The RBA describes an October 1973 oil embargo imposed by OPEC members, Egypt, and Syria on industrial nations that supported Israel. According to its account, oil prices quadrupled and energy rationing followed. The subsequent global recession involved surging unemployment and inflation at the same time—a period of stagflation.
Stagflation illustrates the difficult trade-off created by a severe supply shock: prices can rise while output and employment weaken. It does not mean every cost increase will cause a recession; the result depends on the shock and the economy’s response.
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Euro-area energy prices in 2026
In a European Central Bank (ECB) blog post dated 29 July 2026, Niccolò Battistini and Giovanni Trebbi reported that euro-area headline inflation rose from 1.9% to 2.8% year on year between February and June 2026 as crude oil prices surged amid conflict in the Middle East. The authors said the rise appeared largely driven by an energy supply shock, while emphasizing that supply and demand conditions both matter. They wrote: “Telling the two types of inflation apart in real time is one of the hardest challenges in monetary policy.”
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why a cost shock may fade—or keep inflation going
A one-time increase in an input price can raise the price level without producing an ongoing rise in inflation. Whether pressure persists depends partly on how broad and large the shock is, how long it lasts, and what happens to expectations and wage- and price-setting.
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The Cleveland Fed describes possible wage-price feedback: if workers and businesses expect higher prices to continue, wage demands and businesses’ pricing decisions may help reinforce the initial shock. Expectations can therefore affect how long inflation pressure lasts, but they do not make every supply disruption self-perpetuating. The ECB likewise notes that the shock’s breadth, scale, and persistence, together with initial supply and demand conditions, matter.
What can policymakers do about cost-push inflation?
Monetary policy can influence demand and inflation pressure, but it cannot directly restore a disrupted supply of oil, food, or other inputs. Raising interest rates may restrain demand and help limit broader price pressure; it can also weigh on economic activity, particularly when output is already under strain. The appropriate response depends on the size and persistence of the shock and on whether it is feeding into expectations and wider price- and wage-setting. It is not a mechanical choice to tighten whenever one input price rises.
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