Inflation is one of the most common phenomena in economics. Economists are able to predict inflation by seeing the trends; however, there are times when the prices of certain commodities are increased unexpectedly, resulting in cost-push inflation.
What is Cost-Push Inflation?
It is a form of inflation that occurs when the prices of resources are increased, meaning the companies are receiving less raw material for the same price. Companies cannot afford to increase their production rate to meet the demand, therefore, to keep the product at a relatively the same price, the production is scaled back. Unsurprisingly, this leads to a shortage of goods and services, resulting in price hikes and causing inflation. Hence the name cost-push inflation, i,e., when the cost of production increases, the prices are pushed as well.
Cost-push Inflation Examples in History
1. American Oil Crisis
The United States was built with and for oil, from boilers that heated the homes to the American gas-guzzling automobiles, each aspect of this nation relied on oil. In the early 20th century, the United States primarily relied on natural gas, crude oil, and other energy sources that were readily available within the nation; however, since the 1920s, there was a 5 percent increase in energy demand each year. Unsurprisingly, the local energy sources were unable to keep up with this demand, and it led to the US increasing its import of oil from the middle east. Although oil was imported from other nations before as well, it was not to the same extent. Despite the United States relying on other nations for oil, everything was going smoothly, until the 1970s oil crisis. The Organization of Petroleum Exporting Countries (OPEC), which regulated the majority of the world’s oil reserves, slowed its production significantly. This meant the export of oil to other nations was brought almost to a halt. The United States was affected the most by this embargo. Once a prosperous nation, it was brought to its knees. Each sector that relied on oil for production raised the prices of its products and services. Companies, specifically, automobile manufacturers like General Motors and Ford, cut their production by 80,000 units. Moreover, to continue making profits, companies reduced their workforce by half as well. This is perhaps one of the prime examples of cost-push inflation, in which the increased cost of oil pushed up the prices of other products exponentially.
2. Mexican Corn Shortage
The political tension between the United States and Mexico was an ongoing issue for many years. Fortunately, in the 20th century, the relations between the two countries became better, and finally, in 1994, The North American Free Trade Agreement, eased restrictions on its trade policies. This meant Mexico became heavily reliant on the United States for its corn. Previously, Mexico used to grow the majority of its corn; however, after the ease of the trade restrictions, it went from importing 8 percent of corn to 33 percent. Similar to the United States oil crisis, things were about to change in Mexico. In 2007, the government of the United States subsidized corn production for the production of ethanol. This meant that a large chunk of corn production was used to make ethanol. Despite the production rate of corn increasing in the United States, the supply to Mexico was heavily limited. It increased the prices of corn tortillas, an everyday food item of Mexican cuisine, by 60 percent. The situation became so dire that there were riots, and the government had to introduce new policies to calm the public down. While Mexico was affected by this the most, people in the United States that relied on corn also felt the impact of this cost-push inflation.
3. KFC Chicken Crisis
Kentucky Fried Chicken, as the name suggests, sells fried chicken. This is their primary business model, therefore, having a shortage of chicken means a complete shutdown of the business. This is what happened in 2018 in KFC in the United Kingdom. As businesses are always trying to come up with ways to cut down their expenses, KFC UK decided to work with a new logistic partner in 2018. DHL was decided as the new business partner for KFC UK. Unfortunately, there was a massive delay in the shipment, resulting in 600 out of 900 restaurants being shut down in the country. Although this did not affect the country, the inflation rate for KFC UK was doubled.
4. South Korean Kimchi
Similar to Mexico, which suffered from a shortage of corn, South Korea was also faced with the kimchi crisis in 2010. Kimchi is a dish made from fermented vegetables, typically with napa cabbage, and it is a staple in South Korean cuisine. Although it is one of the most common foods in South Korea, it is imported from China. Due to bad weather in China in 2010, the entire world experienced a shortage of napa cabbage. Undoubtedly, this led to a significant increase in the prices of kimchi. Restaurants began charging 3,000 won for kimchi, meanwhile, an entire meal would cost 5,000 won. South Koreans labeled kimchi as ‘geum-chi’, meaning gold. Additionally, alternatives to make kimchis were experimented with but to no avail. Drastic actions were taken, such as removing the import duties on cabbage, by the government to mitigate this cost-push inflation of the kimchi.
5. Venezuela Sugar Inflation
This is a unique example of cost-push inflation because, for the last decade, Venezuela is experiencing hyperinflation. Each product, whether it be essentials like food or non-essentials like cement, is soaring in price with each passing day. Among all the food items, sugar prices are rising significantly because the government placed a huge tax on the import of sugar, and the production of sugarcane has been on a steady decline in Venezuela. In 2015, the price of sugar increased up to 34 percent. This even affected large corporations such as Coca-Cola, as it decided to stop the production of its beverages in Venezuela. Presently, only sugar-free variants are being produced.
6. American Beef Inflation
After the First World War, the United States was enjoying much-needed prosperity; however, it was not without its share of problems, as the country was dealing with malnourishment. To mitigate this problem, food-producing companies were encouraged to fortify their products, and the government started promoting specific foods to be included in the diet, these included beef and pork. Although beef and pork were enjoyed by the public previously, with constant radio, newspaper, and television commercials, the idea that beef and pork are necessary for health became imbued in the minds of Americans. Everything was going smoothly until the Second World War broke out. To support troops fighting abroad, beef was the food of choice in army rations. This caused a huge shortage of beef for the public within the United States. Interestingly, things were still decent, but once the war ended, the demand for beef skyrocketed. In 1945, the price of beef shot up by 70 percent. While the government decided to set a price ceiling on the meat, it only caused butchers to shut down their businesses.
7. Chocolate Inflation
Chocolate is one of the few edible products that is loved by everyone. Although the origins of chocolate can be traced back to 4,000 years, it was not until the 19th century that the production of chocolate became easier, and by the end of the 19th century, it became everyone’s favorite. Presently, cocoa, a plant from which chocolate is produced, is considered an essential commodity. Therefore, it is easy to understand the feelings of people when the production of cocoa beans decreased in 2015. Ghana and Ivory Coast are the largest producer of cocoa beans, and their production fell by 3.9 percent. This affected the global supply of chocolate, as the rate of cocoa beans was increased by $3,000 per metric ton. As for the customer, the price was increased by $2.57 per kilogram of chocolate. Companies combated this shortage by packaging smaller quantities of chocolate in each pack.
8. Restricted Prohibition of the United States
In present times, the United States is often associated with beer, and its whisky is regarded highly by bourbon lovers. Unlike other countries that produce whisky, the United States has a legacy associated with whisky, which is one of the main reasons why it’s loved by many. During the early 20th century, the temperance movement was strong in the United States. The Temperance movement, along with anti-bar groups believed that alcohol was ruining the societies of the United States, and it must be destroyed. Additionally, the First World War was gaining momentum, resulting in a temporary ban on alcohol production in the United States by Woodrow Wilson, the 28th US president, to use funds in the war. During this time, anti-bar groups reached the government and made prohibition permanent. Selected companies were still producing alcohol during this time, and unsurprisingly, the price of their liquor skyrocketed by up to 30 percent. This law failed miserably, resulting in repealing of the law in the 1930s.