Cost-push inflation

Cost-push inflation originates on the supply side. Firms face higher costs to produce goods and services — raw materials, energy, labour, or imported components — and pass those costs on to consumers through higher prices. Unlike demand-pull inflation, no increase in consumer spending is required; prices rise because it now costs more to produce the same output.

The canonical examples are oil price shocks: the 1973 OPEC embargo and the 1979 Iranian revolution both triggered cost-push inflation across Western economies, as energy is an input in almost every good and service. More recently, the 2021–22 inflation surge had significant cost-push components — supply chain bottlenecks drove input costs up even before demand fully recovered. The IMF World Economic Outlook traced about half of the 2022 global inflation surge to supply-side factors.

Cost-push inflation is particularly difficult for policymakers because it creates a dilemma: raising rates to suppress inflation also reduces output, potentially causing recession. When cost-push shocks are large enough, the result can be stagflation — high inflation combined with stagnant growth and rising unemployment, as occurred in the 1970s. Central banks must decide whether to "look through" a temporary supply shock (accept higher inflation temporarily) or tighten to prevent inflation expectations from becoming unanchored.

The Producer Price Index (PPI) is the primary leading indicator — cost increases typically show up in input prices before consumer prices. Exchange rate pass-through is another mechanism: a weaker currency raises import costs, which feeds into commodity and goods inflation. The BLS publishes monthly PPI data alongside CPI; the gap between PPI and CPI growth can indicate whether upstream cost pressures are still passing through to consumers. Our inflation components guide shows how to read these signals.