The answer is really based on circular reasoning. Keynes coined the phrase, and stated that cost-push occurred when labor and/or materials increased in price suddenly while demand for the end product remains constant. It's definitely real, IMO, since Keynes framed what it was. We can see it occur in the real world. Of course, producers can choose to swallow the marginal increases in costs, which would mean they wouldn't push the cost on to consumers, but that's only the case when demand is declining or will decline if they push.
i completely agree with. the problem is that most people in mainstream economic do not acknowledge it. they differentiate between inflation as a money supply increase and state what we consider cost push inflation as a supply shift. so it is not reflected in most inflationary scenarios. the only time is when the price of labour/materials rises and that price is included. it makes inflation look lower than it is and set the president to inflation targeting no acknowledgement of increased prices due to shortages. this caused problems in the 1970's with stagflation it was in my opinion cost push inflation but they said it was just over exerted money supply. thank you for your reply.
there is an argument that no one at least to my knowledge has made. that is that the rise in prices for materials and labour is a result of demand push inflation in the first place. namely the increase in price has occurred as addition currency units in the economy extending the value of the prices of the materials and labour. in short too many dollar for too little resources. however this does not take into consideration other aspects namely shortages from the result of increased demand for the same resources from other countries. that has no affect on the currency units in the domestic economy. prices however rise. also when oil prices rise the means of production rise and is not due to extra currency.
Self-taught from the wiki university, huh? Let me give you a hint : each economic school has predictive strengths and weaknesses. No one school accurately predicts the entirety of market behavior, because each are flawed or incomplete, in different ways. You don't understand true money theory because its comprised both of demand (money and credit), and supply (factor inputs). Historical examples abound when physical supply shortages resulted in inflation with fixed money. Yes, it really can happen. The 70's OPEC embargo, a perfect example.
This is all macro 101. The convexity and shape of the demand and supply curves are defined by theory of credit and supply. A shift in the demand curve rightward (from increased credit - lower rates etc), creates a new equilibrium point for national income (higher) AND price level (higher = inflation). Why price level? Producers employ furloughed, higher-cost equipment to meet demand and use overtime, primarily (capital and labor). These are primary affects from a demand-side shift. The confusion here surrounds what constitutes supply-side effects from a demand shift and what constitutes supply-side effects from a supply side shift. Supply side shifts are otherwise coined supply SHOCKS, when labor, capital, or notably energy, go through the roof for some exogenous reason (war, embargo, shortage) other than credit and devaluation. Whats difficult to tease apart is the dynamic between demand-side only shifts that eventually lead to a supply shift (mini shock) rightward. As huge liquidity pushes demand and producers strain to meet output, those producers increased finished goods cost become a NEW FACTOR INPUT COST for the next chink down the chain (manufacturer), and a right-ward shift does occur. Look up supply and demand curves under neo-classical on wiki, if interested. Or, better yet, buy a macro 101 book from a good university book store and read the whole thing, cover to cover.
They knew it was both but had to react, regardless. Supply shocks just as easily lead to wage-price spirals as "Validated" demand shocks. If Volcker kept loose credit with oil @ 140$, real adjusted, inflation would have literally gone berserk in a hyper-stagflation type scenario. When confronted with a massive supply shock, its death to the economy. No matter what. So the logical course was to minimize long-term damage by protecting the value of the dollar. If that supply shock was met with even more credit (post-Vietnam spending spree..), spiraling inflation would have resulted. They had to kill demand to save the dollar and national wealth. Short-term pain = long-term gain. The opposite would be a mini Weimar Republic with Americans losing all of their savings, and a big chunk of their hard equity (stocks, real estate), as neither asset class keeps pace with spiraling inflation adjusted in real terms. Afterall, when an economy destabilizes under those conditions, absolute demand for assets based-in or tied to that particular economy collapse, even as the paper value of those assets skyrocket. See Zimbabewae. Land owners booked hundreds of trillions in appreciation, but can't catch a bid on it! Who the F* wants to live in a shit hole like that ?? Same idea. When the Country disintegrates, foreign capital stays away while national wealth is destroyed by inflation...... Very, very dangerous.
For a producer to be able to pass on higher prices to consumers, they have to be selling a product with inelastic demand. If the demand is highly elastic, any rise in price would offset profits by a larger drop in demand. This dillema for producers has been offset by the market becoming global for most commodities. We have a situation where demand could be falling in the US, but is offset by China. A big problem with supply and demand calculations is governments. Governments try to offset a drop in demand by stockpiling commodities, as we have seen this year. So, even if we have the illusion that free markets work the way textbooks try to relay, in the real world there are too many distortions being made to understand these issues in econ 101 terms.
Agree, nothing is textbook. Explains why economists aren't millionaire traders. The point about Demand elasticity is compared well with cheap and easy credit. Hence the academic term of "validated" supply shocks. Even when producers hike prices to maintain eroding margins from higher input costs, demand (credit) can validate that inflation through cheaper and more plentiful pumps which - assuming credit reductions are meaningful and consumers/business debt is low.... - exacerbates and lends momentum to wage-price spiral. This is what was feared in the 70's with such a huge energy shock. Gov intervention, stockpiling, mercantilism, are all true and good points. Throw in considerations for market "irrationality", as opposed to how it should act, and its dart game, most of the time. Fundamentally.
Achilles82, would you care to share your outlook on the inflation/deflation debate in say the next couple of years? Cheers.