NationMaster - Encyclopedia: Cost push inflation

Cost-push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. A situation that has been often cited of this was the oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the Western world in that decade. It is argued that this inflation resulted from increases in the cost of petroleum imposed by the member states of OPEC. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the inflation rate. This can raise the normal or built-in inflation rate, reflecting adaptive expectations and the price/wage spiral, so that a supply shock can have persistent effects. A good in economics is any object or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... At the height of the crisis in the United States, drivers of vehicles with odd numbered license plates were allowed to purchase gasoline only on odd-numbered days of the month, while drivers with even-numbers were limited to even-numbered days. ... The 1970s decade refers to the years from 1971 to 1980, inclusive. ... The term Western world or the West can have multiple meanings depending on its context. ... Pumpjack pumping an oil well near Sarnia, Ontario Petroleum (from Greek petra â€“ rock and elaion â€“ oil or Latin oleum â€“ oil ) or crude oil, sometimes colloquially called black gold, is a thick, dark brown or greenish liquid. ... Logo The Organization of the Petroleum Exporting Countries (OPEC) is made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela; since 1965, its international headquarters have been in Vienna, Austria. ... Inflation, In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation). ... Built-in inflation is a concept from economics referring to a type of inflation that resulted from past events and persists in the present. ... In economics, adaptive expectations means that people base their expectations of what will happen in the future based on what has happened in the past. ... In macroeconomics, the price/wage spiral (also called the wage/price spiral) represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. ... A supply shock is an event that suddenly changes the price of a commodity or service. ...

Monetarist economists such as Milton Friedman argue against the concept of cost-push inflation because they believe that increases in the cost of goods and services do not lead to inflation without the government and its Central Bank cooperating in increasing the money supply. The argument is that if the money supply is constant, increases in the cost of a good or service will decrease the money available for other goods and services, and therefore the price of some those goods will fall and offset the rise in price of those goods whose prices have increased. One consequence of this is that monetarist economists do not believe that the rise in the cost of oil was a direct cause of the inflation of the 1970s. They argue that although the price of oil went back down in the 1980s, there was no corresponding deflation. Monetarism is a set of views concerning the determination of national income and monetary economics. ... Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... The examples and perspective in this article or section may not represent a worldwide view. ... MacGyver - 1980s hero The 1980s decade refers to the years from 1980 to 1989, inclusive. ... Deflation is formally a decrease in the money supply. ...

Keynesians riposte that in a modern industrial economy, many prices are sticky downward or downward inflexible, so that instead of prices falling in this story, a supply shock would cause a recession, i.e., rising unemployment and falling gross domestic product. It is the costs of such a recession that likely causes governments and Central Banks to allow a supply shock to result in inflation. They also note that though there was no deflation in the 1980s, there was a definite fall in the inflation rate during this period. Actual deflation was prevented because supply shocks are not the only cause of inflation; in terms of the modern triangle model of inflation, supply-driven deflation was counteracted by demand pull inflation and built-in inflation resulting from adaptive expectations and the price/wage spiral. Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... A recession is usually defined in macroeconomics as a fall of a countrys real Gross Domestic Product in two or more successive quarters of a year. ... An 1837 political cartoon about unemployment in the United States. ... A regions gross domestic product, or GDP, is one of several measures of the size of its economy. ... Inflation, In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation). ... In macroeconomics, the triangle model of inflation is a generalization of the Phillips Curve employed by new Keynesian economics and given its name by Robert J. Gordon. ... Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply. ... In economics, adaptive expectations means that people base their expectations of what will happen in the future based on what has happened in the past. ... In macroeconomics, the price/wage spiral (also called the wage/price spiral) represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. ...

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