When the cost of an important factor of production, such as labour or energy increases, the short run aggregate supply curve of the economy is shifted to the left. At the new short-run equilibrium, output is lower, but price is higher. If the central bank opts to stimulates aggregate demand so output returns to its long-run potential, the result would be a further increase in the price level. This is known as cost-push inflation because it is brought about by increase in costs of production to the producers.
Compare: Demand-Pull Inflation« Back to Index