Question

Explain any three causes of cost-push inflation.

State two factors causing cost-push inflation.

Answer 1

1. Fluctuations in Output and Supply: The wide fluctuations in the production of food grains have been mainly responsible for price rises. There was a remarkable increase in the production of foodgrains during the first two plans and the supply of foodgrains was good. But fluctuation in foodgrain production, support prices administered by the Government, and the tactics of hoarding, adopted by the middlemen and subsequently by the farmers too (utilizing the credit facilities – available from co-operatives and commercial banks), resulted in an increase in price. The power breakdowns, strikes, and lockouts result in lower production of manufactured goods. As such, both the primary and secondary sectors recorded a price rise almost during all the plan periods.
2. Public Distribution System: The defective working of the public distribution system results in an uneven supply of various goods, ultimately affecting the prices of essential commodities by way of artificial scarcity.
3. Rise in Wages: The rise in the general price level raises the cost of living, which, in turn, leads to demand for higher wages by workers. When the demand for higher wages is met, it will lead to a further rise in costs or prices. The fresh rise in prices will again be compensated by giving still higher wages to the workers. This is termed as ‘wage push inflation’.
4. Increase in the price of basic materials: Basic materials such as steel, chemicals, oil, etc., are used directly or indirectly in major industries. Thereby, any increase in the prices of these basic materials affects the entire economy, and prices tend to increase.