Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which term is used to refer to the inflation resulting specifically from wage increases?

1. Cost-push inflation

2. Demand-pull inflation

3. Expectational inflation

4. Import cost push inflation

The correct answer is: Cost-push inflation

Cost-push inflation refers specifically to the situation where overall prices increase due to rising costs of production, which can occur when wages increase. When workers demand higher wages, companies often face higher labor costs. These companies might then pass on these added costs to consumers in the form of higher prices for goods and services, leading to inflation. This type of inflation is distinct from demand-pull inflation, which occurs when demand for goods and services exceeds supply, driving prices up due to increased consumer spending. Expectational inflation refers to inflation influenced by the expectations of future price increases, affecting how prices shift based on anticipated economic conditions. Import cost push inflation involves rising prices due to increased costs of imported goods, which is a different aspect of economic inflation influenced by trade factors. The context of the question highlights the specific link between wage increases and ensuing inflation, which underscores why cost-push inflation is the correct term to use in this scenario.