Cost-push inflation
A rise in the general price level caused by higher input costs to producers — wages, raw materials, energy — rather than by demand outrunning supply.
In plain language
Prices do not only rise because people want to buy more. They can also rise because it costs more to make things.
When the cost of inputs goes up — say, fuel or raw materials — producers pass that higher cost on in their prices. That is cost-push inflation, and it is a distinct cause from demand-pull inflation, where demand simply exceeds available supply.
How it works
The workbook's own distinction: "An increase in the price of goods and services because demand being more than available supply, is called demand pull inflation. An increase in prices because of an increase in input costs is called cost-push inflation." Both are tracked through the same two indices — the Wholesale Price Index (WPI) at the wholesale level and the Consumer Price Index (CPI) at the retail level — over a defined basket of goods and services.
The policy response differs by cause: the workbook notes that to defuse inflation generally, policy makers act to reduce demand or increase supply, or both — but a purely cost-push episode, driven by an external input-cost shock, is harder to cool through demand-side measures alone than a purely demand-driven one.
A worked example
A sharp rise in global crude oil prices pushes diesel costs up sharply. A packaged-food company's distribution cost per tonne rises from Rs 1,200 to Rs 1,500, a 25% increase, even though nothing has changed in how much consumers want to buy.
The company passes this higher transport cost through into its shelf prices. Retail prices rise across its packaged goods — not because demand for them has grown, but because the cost of getting them to the shelf has. That is cost-push inflation working through the supply chain.
Why NISM asks about it
Chapter 5.3.3 (Inflation and Interest Rate) sets out demand-pull and cost-push inflation in the same paragraph. Expect a scenario question describing rising input costs (not rising demand) and asking which type of inflation it illustrates.
Common exam traps
- Rising prices are not automatically demand-driven. A scenario describing higher input costs, with demand unchanged, is testing cost-push inflation specifically — reading every price-rise question as demand-pull is the common error.
- WPI and CPI can diverge in the same period, since they track different baskets at different points in the supply chain.
Where this is taught
Free preparation for NISM Series XVRelated terms
- CPIAn index tracking the retail-level prices of a defined basket of goods and services over time — the standard measure of the inflation actually felt by consumers.
- Demand-pull inflationInflation caused by demand running ahead of the supply available to meet it — too much money chasing too few goods.
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.
- Crop reportA government or research-agency publication giving acreage, planting progress, yield estimates and production levels for a crop — a key input to predicting agricultural commodity prices.