Your favourite businesses are raising prices. Here's why
The quick version:
Cost-push inflation is when rising input costs lead businesses to raise retail prices
Rising input prices include higher wages, energy and rent costs (these higher costs push up retail prices)
Cost-push inflation is happening in Australia in 2022. According to the National Australia Bank, business purchase costs are at record levels. This is leading to higher inflation in the Australian economy.
Cost-push inflation is rising in Australia.
What is cost-push inflation?
Cost-push inflation is a cause of inflation. It occurs when higher input costs for businesses PUSH UP prices across the economy.
Basically firms face higher input costs and, rather than absorb these costs and reduce profits, they pass on higher costs to consumers.
The end result: consumers pay higher prices.
An example of cost-push inflation
As of April 2022, Australia’s unemployment rate is a very low 4 per cent. This means that businesses may find it hard to secure workers as many people are already employed. To attract workers, firms may need to pay higher wages. And wages are a cost for businesses.
A firm could absorb the higher wages cost. But this would reduce their profit (as profit = revenue - costs). Instead, the firm will pass on the cost of higher wages to consumers in the form of higher prices. Consumers will ultimately pay for the higher employee wages.
When prices rise, inflation rises. In our example, input costs (wages) have pushed inflation higher.
Other sources of cost-push inflation could be higher energy prices (electricity or petrol), more expensive food and higher rental costs.
How cost-push inflation works
Cost-push inflation in the Australian economy in 2022
National Australia Bank (NAB), one of Australia’s big four banks, publishes a monthly business survey. According to the survey, firms’ purchase costs (the cost of their inputs) rose by 4.2 per cent in the March quarter.
[The March quarter covers January, February and March.]
This 4.2 per cent rise is a record for the NAB survey. The survey also found that labour costs — as discussed in our example above — rose by 2.7 per cent in the March quarter. This was another record rise.
NAB Chief Economist Alan Oster said that many industries were experiencing rising input costs. This is what the survey calls ‘purchase costs’.
“Purchase costs reached records with elevated oil prices adding to existing supply chain issues, and labour costs are also rising as businesses hire more workers in a very competitive labour market,” Mr Oster said.
These rising input costs are leading directly to higher prices. According to the NAB survey, retail prices rose by 3.7 per cent over the March quarter of 2022. This is a record level for the survey.
Why does cost-push inflation matter?
Rising cost-push inflation is another sign that Australia’s inflation rate is rising (potentially rapidly) . This adds to the likelihood that the Reserve Bank of Australia will soon begin raising the cash rate to try and control inflation. The RBA meets monthly and many economists believe the cash rate could be raised as soon as June 2022.
When we talk about the RBA raising rates, we’re discussing monetary policy. Check out this article for more about this important macroeconomic policy.