Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which factor does NOT contribute to cost-push inflation?

1. Escalating prices of imported raw materials

2. Excessive growth in the money supply

3. Wage increases

4. Increased costs of production

The correct answer is: Excessive growth in the money supply

Cost-push inflation occurs when the overall prices of goods and services rise due to increases in the costs of production. This can happen through various factors, such as higher costs for raw materials, wages, or other production costs. The escalation of prices for imported raw materials significantly increases production costs for businesses. When these costs rise, companies may pass on these expenses to consumers by raising prices, contributing to inflation. Wage increases also lead to cost-push inflation. When employees demand higher wages, businesses face increased labor costs. To maintain profit margins, companies often adjust their prices upward, resulting in higher overall prices in the economy. Increased costs of production, which encompass a range of factors including raw material and labor costs, directly lead to cost-push inflation. When it becomes more expensive to produce goods and services, businesses typically raise prices, creating inflationary pressure. The excessive growth in the money supply, while often associated with demand-pull inflation, does not directly relate to cost-push inflation. Rather, it can lead to inflation by increasing overall demand without a corresponding increase in supply, thus driving prices up due to consumer spending power rather than rising production costs. This distinction is critical in understanding the different types of inflation and their causes.