Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does import cost push inflation stem from?

1. Rising production costs

2. Increases in wage rates

3. Escalating costs of essential imports

4. Changes in consumer demand

The correct answer is: Escalating costs of essential imports

Import cost push inflation arises specifically from escalating costs of essential imports. When the prices of key imported goods, such as raw materials, energy, and food, increase due to factors like supply chain disruptions, geopolitical tensions, or currency depreciation, these higher costs are often passed on to consumers in the form of increased prices for goods and services. This scenario leads to inflation, as the overall cost of living rises due to the higher expenses associated with imported goods that are critical for production and consumption. In contrast, while rising production costs and increases in wage rates can contribute to inflation in a general sense, they do not specifically pertain to import cost push inflation. Changes in consumer demand can also influence inflation, but that pertains more to demand-pull inflation, which is driven by increased consumer spending rather than rising import costs. Thus, the most accurate reflection of import cost push inflation is found in the escalating costs associated with essential imports. This understanding is crucial for recognizing how external economic factors can impact domestic inflation rates.