Cost-push inflation is most likely caused by:

Question

BlackTom AI · Accepted Answer

Cost-push inflation arises when production costs for firms increase, causing the short-run aggregate supply (SRAS) curve to shift leftward, raising the general price level while reducing real output.

1. Relevant knowledge points and concepts
- Cost-push inflation: inflation caused by increases in costs of production (wages, raw materials, energy), which reduce supply and push prices up.
- Short-run aggregate supply (SRAS) shift left → higher price level and lower GDP (stagflation possible).
- Distinction from demand-pull inflation: caused by increases in aggregate demand (AD).
- Wage-price dynamics: higher negotiated wages raise unit labor costs; firms pass costs to consumers as higher prices.

2. Step-by-step reasoning
- If unions successfully negotiate higher wages, firms’ labor costs rise.
- Higher labor costs increase unit costs of production across many firms.
- The SRAS curve shifts left because, at any given price level, firms supply less output when costs are higher.
- The equilibrium moves to a higher price level (inflation) and lower real output — classic cost-push inflation outcome.
- Therefore, strong wage bargaining by unions is a plausible direct cause of cost-push inflation.

3. Calculations
- No numerical calculation required; the mechanism is qualitative and illustrated by shifts in SRAS.

4. Why the correct answer is correct
- “Unions with strong bargaining power successfully negotiate higher wages for workers” directly raises production costs economy-wide. That increase in costs is the defining mechanism of cost-push inflation, so this option matches the textbook cause.

5. Why the other options are incorrect
- “A surge in aggregate demand…” describes demand-pull inflation, not cost-push. It works via AD shifting right, increasing output and prices, not via higher costs.
- “An increase in the price level” is a description of inflation itself, not a causal mechanism; it’s circular.
- “A reduction in interest rates by the Reserve Bank…” typically boosts AD (cheaper borrowing) and leads to demand-pull inflation, not cost-push.

6. Conclusion
The best answer is that unions negotiating higher wages can cause cost-push inflation. This matches the provided correct answer.

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