Inflation that arises due to rising costs of production

Solution

Cost-push inflation occurs when the overall price level in an economy increases due to rising production costs. When inputs like labour, raw materials, or energy become more expensive, producers pass on these higher costs to consumers in the form of increased prices. This often leads to: • A reduction in aggregate supply, as firms may cut production when costs rise. • Sustained upward pressure on prices even without a surge in demand. By contrast, demand-pull inflation happens when excessive demand drives prices higher, whereas cost-push is strictly linked to supply-side constraints and input costs.