Cost Push Inflation
• Inflation may originate from supply side also.
• Aggregate demand remaining unchanged, a fall in aggregate supply due to exogenous cause, may lead to increase in price level.
• In this graph, the starting point is the equilibrium price (Op) and output (Oq).
• If aggregate supply has fallen, the SS curve shifts left ward to S1 S1 .
• At price Op now supply will be Oq2but demand Oq.
• This will push prices high till a new equilibrium is reached at Op1 .
• At the new price there will be no excess demand.
• Inflation is thus a self limiting phenomenon.
• The continuous rise in price level is visible in the naked eye.
• One can see the annual rate of increase in the price level. Repressed inflation
• There is excess demand.
• The excess demand is prevented from increasing price level by some repressive measures.
• The measures taken by the government like price control, rationing etc.