Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which cause of inflation is linked to rising production costs?

1. Demand pull

2. Cost push

3. Import cost factors

4. Wage inflation

The correct answer is: Cost push

Cost push inflation is a phenomenon that occurs when the overall production costs increase, leading to a decrease in the supply of goods and services. This typically happens when the costs of essential inputs—such as raw materials, labor, and utilities—rise, causing producers to pass on these increased costs to consumers in the form of higher prices. The result is an upward shift in the aggregate supply curve, which leads to higher price levels in the economy while often resulting in stagnating quantities produced. This type of inflation is distinct from demand pull inflation, which arises from an increase in aggregate demand, rather than a decrease in supply due to rising production costs. While factors like import costs and wage inflation can contribute to cost push inflation, they do not account for the entire phenomenon on their own; they are more specific subsets of it. Wage inflation, in particular, refers specifically to rises in wages leading to increased costs, rather than signaling the broader impacts on production costs. Thus, the choice identifies the primary characteristic of cost push inflation accurately in linking it directly to increased production costs.