Cost Push Inflation

Cost Push Inflation

Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. 1973 Oil crisis is a typical example of cost push inflation where the OPEC countries controlled the oil outflow from their reserves(oil embargo) there by pushing the oil prices of the European countries which in turn had led to inflation.