The diagram on the left shows cost push inflation. If costs rise then some of these are passed on and so prices rise - don't they?These prices may be wages, tax or materials.
But...
If prices rise then I have less money to buy something else. Thus my demand for 'something else' falls and the price of that 'something else' falls.
And so the cost push inflation effect is cancelled out...isn't it?
In which case cost push inflation doesn't exist....does it?
In this case, i think the cost push inflation may not exist when there is an increse in price of goods and services IF the income stays the same.
ReplyDeleteMonetarist economists such as Milton Friedman argue against the concept of cost push inflation because they believe that increases in the cost of goods and services do not lead to inflation without the government cooperating in increasing the money supply. The argument is that if the money supply is constant, increases in the cost of a good or service will decrease the money available for other goods and services, and therefore the price of some those goods will fall and offset the rise in price of those goods whose prices have increased.
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