Providing a brief, straightforward explanation for economic concepts is not always easy, but fortunately the theory of cost-push inflation can be explained in 500 words or less. Economics is largely about comparing different schools of thought, and the major proponent of the cost-push inflation model is a British economist named John Maynard Keynes. Keynes believed that the health of a country's economy depending on a mix of government and private controls. Under his economic model, cost-push inflation occurs whenever the cost of production suddenly rises but the demand for the product or service remains the same. This additional cost must be passed onto the consumer, which in turn increases the retail price.
There are a number of factors which could create cost-push inflation, but the two most obvious causes are wage increases and increased material costs, especially imported goods. The retail price of a product is often based on the current wages of the workers who produce it, so whenever workers receive raises in pay, the production costs increase as well. The company can't afford to absorb this increase internally, so the added expense of production is passed directly to consumers. Since the consumer's own wages may not have risen, the price increase is a form of cost-push inflation. The same dollar which could have bought the product last week can now only buy 90% of that product this week. This is what economists would call a lowering in spending power.
Another cause of cost-push inflation is an increase in the cost of materials or services rendered to the manufacturer. If a foreign economy collapses, the cost of importing materials from that country can rise exponentially. The cost of delivering materials to the manufacturing plant might also increase dramatically during an energy crisis or extended strike. A manufacturer may decide to absorb some of these added expenses in order to maintain a competitive price, but not all of them. The result could be an increase in the retail price and a real-life demonstration of the cost-push inflation theory.
There is also an equal but opposite economic event called demand-pull inflation, which other economists besides Keynes tend to support as the root cause of most consumer price inflation. Unlike cost-pull inflation, demand-pull inflation is affected by demand for a product, not necessarily the available supply. When gasoline supplies become tight during a holiday season, for example, the price is likely to rise because of a higher demand for the product from vacationing drivers, not just the ebb and flow of oil production levels. Under the theory of depend-pull inflation, gasoline prices would increase because of higher wages for the oil workers or an increase in the price per barrel of unprocessed crude oil.
The argument against an increase in the federal minimum wage often includes a reference to cost-push inflation. If the base wages of workers is increased, then the manufacturers may feel obligated to pass these increases onto consumers in the form of higher prices. Since an increase in the minimum wage may not benefit workers who already receive higher salaries, their spending power may be reduced as a result of these price adjustments. The theory of cost-push inflation does suggest this scenario is possible, but historically the raising of the federal minimum wage has not resulted in long-term inflation, since other wage earners may also receive raises as well. A rising tide tends to lift all boats.
