Cost-push inflation, also referred to as supply-shock or sellers’ inflation, is an increase in the general level of prices caused by a leftward shift of an economy’s aggregate supply curve. Aggregate supply/aggregate demand (macroeconomic) analysis describes the interrelationship of real gross domestic product (GDP) and the general level of prices (inflation). Assuming nothing else changes, a decrease in aggregate supply will result in both higher prices and reduced level of output (GDP). The most widely quoted example of cost-push inflation in the United States is the period from 1973 to 1980, during which the price of oil went from $2 to $30 per barrel. When the ORGANIZATION OF PETROLEUM EXPORTING COMPANIES (OPEC) effectively reduced the supply of oil, driving up oil prices, western countries experienced supply shocks. During the 1990s the United States imported approximately 50 percent of its oil needs. Because there are few substitutes available, the demand for oil and products derived from it are inelastic; higher oil prices do not significantly reduce the quantity demanded. The result is a double negative: higher prices and higher unemployment associated with reduced GDP. Cost-push inflation is also a result of other pressures increasing prices while decreasing output. Wage increases greater than increases in productivity increase the cost of production, causing inflation. Increased market power by firms, allowing them to raise prices while reducing supply, results in cost-push inflation. When either wages or market power increases in many sectors of an economy, the economic system will experience cost-push inflation.
See also macroeconomics.