Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What typically causes "cost-push" inflation?

1. A decrease in consumer spending

2. An increase in production costs

3. A rise in government spending

4. A fall in national income

The correct answer is: An increase in production costs

Cost-push inflation occurs when the overall price levels rise due to increases in production costs. This means that businesses face higher expenses for raw materials, wages, and other inputs necessary for manufacturing goods or providing services. As these costs climb, producers may pass on the higher expenses to consumers in the form of increased prices, leading to inflation. For example, if oil prices spike, the cost of transportation and goods that rely on oil will also rise, resulting in higher prices for consumers. Thus, an increase in production costs is directly linked to cost-push inflation, as it fundamentally drives the need for businesses to adjust their pricing structures upward to maintain profit margins.