UPWARD MOVEMENT IN COST

A number of factors are responsible for upward movement in the costs.

(i) Higher Wage Rates:

With the growth of powerful trade unions in the modern economy, workers successfully secure higher wages for them, even greater than the increase in their productivity. When firms find that their labour cost is rising, they raise the price to cover the higher cost. A rise in the prices of goods leads to higher cost of living or a fall in real wages. To neutralize this fall, workers demand further hike in their wages. The ultimate burden of the rise in price, in any case, is to be borne by the consumer. A series of rise in wage rate and consequent rise in price builds an inflationary pressure (wageprice spiral) in the economy, called wage push inflation. Such inflation occurs in imperfectly competitive labour market, It is not possible, where labour is unorganised or has been suppressed by the powerful authorities or monopsonistic producers.

(ii) Higher Profit Margins:

Cost can also be increased through fixing a higher profit margin by monopolist producers, hoarders and speculators. They are in a position to raise prices more than enough to offset any cost increase. Others in the market are at the mercy of the monopolists and have no choice but to accept them as given. The producers gain, since demand exceeds the supply. In a perfectly competitive market, however, possibility of the profit push inflation is ruled out. This is true for the market of agricultural products. However, when prices of agricultural products are fixed by the government, organized peasant lobby may have some control over the price it sells the agricultural produce. In India, the peasant lobby did succeed to a great extent in forcing the government to ensure prices that turned out to be a source of profit push inflation. Profit push inflation may be the result of wage push inflation. It is relatively simple to bring down profit push inflation, as it only involves a reduction of the selling price by the producers. However, wage push inflation is difficult to withdraw, once a never ending wage-price spiral has emerged.

(iii) Higher Taxes:

Government can enchance the cost by introducing a variety of taxes and raising the existing rates of taxes, particularly indirect taxes like excise duties and sales taxes. The producers shift the burden of taxes to the consumers by raising the prices of goods.

(iv) Availability and Prices of Basic Inputs :

When there is a shortage of strategic and basic raw materials and other inputs, their prices shoot up. A number of important inputs are controlled by the government or other authorities. Their prices are administered by the supplying organizations. For instance, the price of the crude oil is administrated by the Organization of Petroleum Exporting Countries (OPEC). Since oil forms a basic input for a number of industries, continuous  upward revisions of its price by OPEC affect all these industries. Therefore, a price hike of even one basic input may suffice to raise the general level of prices and could be a source of cost push inflation in the economy.

(v) Other Factors :

Fall in agricultural production due to insufficient, excessive, uncertain, irregular rainfall or other natural calamities like floods, droughts, famine, etc. reduce the aggregate supply and raise the price of agricultural goods. Similarly, fall in industrial production on account of strikes, lock-outs, break down of power supply, government’s domestic or foreign policy may shift the supply curve upwards, resulting in an upward trend in the prices.