Which of the following can lead to cost-push inflation?

• A. Increased consumer spending
• B. Supply shocks affecting production
• C. Decrease in interest rates
• D. Increased economic growth

Answer: (B)

Cost-push inflation occurs when the overall price levels rise due to increases in the cost of production. This can happen when the costs of raw materials and labor increase, leading businesses to raise their prices to maintain profit margins. A supply shock, such as a natural disaster, geopolitical instability, or a significant increase in the price of essential commodities, directly impacts production costs and reduces the overall supply of goods in the economy. When supply decreases while demand remains constant or increases, prices must rise, leading to cost-push inflation.

In contrast, increased consumer spending typically drives demand-pull inflation rather than cost-push inflation. A decrease in interest rates can stimulate demand by making borrowing cheaper, which may also lead to demand-pull inflation. Increased economic growth usually implies rising demand for goods and services, which often results in demand-pull inflation rather than cost-push, as well. Thus, the connection between supply shocks and rising production costs makes it clear that this scenario is a direct cause of cost-push inflation.