Background
Cost inflation refers to the phenomenon where rising production costs lead to overall price increases in the economy. These costs can arise from various factors such as higher wages, raw material prices, energy expenses, and other input costs.
Historical Context
The concept of cost inflation gained prominence in the mid-20th century with the rise of Keynesian economics, which sought to explain inflation as not merely a monetary phenomenon but also a result of cost pressures within the economy.
Definitions and Concepts
In Keynesian economics, cost inflation occurs when increases in certain prices or wage rates propagate through the economy. Producers, facing higher costs, raise their prices, which then prompts workers to demand higher wages to maintain their purchasing power. This, in turn, induces further price boosts, creating a cycle difficult to break, known as the cost-inflationary spiral.
Other related terms include:
- Wage–Price Spiral: A sustained increase in wages and prices as workers and firms adjust to rising costs.
- Demand Inflation: Inflation driven by an increase in demand across the economy.
Major Analytical Frameworks
Classical Economics
Classical economists traditionally focus on the role of money supply in inflation, often downplaying cost factors outside long-term considerations.
Neoclassical Economics
While recognizing cost-push factors, neoclassical models emphasize market adjustments where prices should eventually revert to balance supply and demand influences.
Keynesian Economics
Keynesians underscore cost inflation by explaining that specific price increases can spread throughout an economy, contributing to a general upward price trend.
Marxian Economics
Within a Marxist framework, cost inflation is inherent to capitalist economies where persistent class struggles between capital and labor result in uneven price rises.
Institutional Economics
Institutionalists would examine how organizational dynamics, labor unions, monopolies in labor or input markets can contribute to cost increases, and thereby, inflation.
Behavioral Economics
From a behavioral viewpoint, inflation expectations can solidify cost inflation if businesses and workers adjust their pricing and wage demands accordingly.
Post-Keynesian Economics
Post-Keynesians further the Keynesian analysis, perhaps focussing on how certain economic policies can create lasting cost-push inflationary pressures.
Austrian Economics
Austrians would likely interpret cost inflation in terms of relative scarcities and entrepreneurial adjustment rather than systemic faults or policy errors.
Development Economics
In developing economies, cost inflation may stem from infrastructural deficits, leading to higher transportation and production costs.
Monetarism
Monetarists focus on the role of central banks and money supply but concede that transient cost-push factors can create short-run inflation.
Comparative Analysis
Contrasting demand and cost inflation provides a clearer understanding of how absent or compounding from different sources results in overall price level changes. Measures to counteract these forms of inflation differ substantially in microeconomic policy targeting.
Case Studies
Various countries, particularly in periods of economic shock (e.g., during oil crises), offer case studies showing empirical instances of cost inflation’s impact.
Suggested Books for Further Studies
- “Inflation: Causes and Consequences” by Milton Friedman
- “The Economics of Inflation: A Study of Currency Depreciations in Post War Europe” by Costantino Bresciani-Turroni
- “Inflation Targeting: Lessons from the International Experience” by Ben S. Bernanke, et al.
Related Terms with Definitions
- Wage-Price Spiral: A situation where rising wages increase production costs, thus increasing prices which then leads to further wage demands.
- Demand Inflation: Inflation that results from an increase in aggregate demand.
