Separating the cost-push from the inflation

Mine of the 27th is about how the growth of one sector of the economy (relative to the rest of the economy) can create cost pressure that tends to cause cost-push inflation... One sector, like "government" or like my favorite target, "finance".

Mine of the 25th is part of a series about how a decline of labor productivity (caused by labor force growth) may create cost pressure that tends to cause cost-push inflation.

Both posts are about cost-push inflation arising from some source other than rising prices (like the price of labor). In neither post does the cost pressure initially arise from rising prices that must be paid.

• Sectoral growth can create pressure simply because there are more transactions -- more people paying taxes, for example, or more people borrowing money. The cost pressure can arise even without increases in tax rates or interest rates. I say this all the time about interest rates versus the amount of debt on which interest must be paid.
  
  
• Falling labor productivity creates pressure not because it increases wage rates, but because it reduces the output that labor creates. The cost is generated internally, within the business itself, and passed on from there. 

I'm tempted to say that in *no* case does the cost pressure initially arise from rising prices that must be paid. But I can't imagine that's 100% true.

 

I notice that, more and more, I am separating the "cost-push" problem from the "inflation" problem in "cost-push inflation".

The "cost-push" problem -- the cost problem -- may arise from unusual circumstances like extremely rapid increase in the Labor Force Participation Rate for a year,, say, or persistent, long-term growth of the financial sector, or perhaps from other causes.

The "inflation" problem arises when some change in "money" makes possible an increase in spending and aggregate demand, perhaps as a solution to a cost problem or to the "slow growth" problem that arises therefrom.

But we must never forget that of the two, cost and inflation, it is cost that is the greater problem. Cost reduces economic growth. Sustained cost -- which economists have defined out of existence, by the way -- is how civilizations die from suicide.

Inflation may postpone this but does not prevent it.