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Cost Push Inflation

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    Are there any effective policies to reduce cost push inflation for a govt
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    (Original post by pwcroberts)
    Are there any effective policies to reduce cost push inflation for a govt
    You could argue that reducing taxes/increasing subsidies to firms would reduce the firms costs- but whether it would reduce cost push inflation may depend on the willingness of the firm to pass on savings to consumers? (Would come under fiscal policy, gvt spending/taxation)
    Reducing the NMW could help some firms to reduce labour costs?
    Could aim to increase productivity and so reduce unit costs (perhaps through supply side policies of training/improved infrastructure etc)
    Pretty weak arguments really!
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    Supply side policies
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    I'm doing this sort of stuff at the moment. It's not enjoyable. Inflation in an economy such as the UK will usually be a mixture of cost-push and demand-pull. The below will generally reduce inflationary pressure.

    Fiscal Policy - A contractionary fiscal policy such as a expenditure reduction policy or rise in taxation could have this effect. A cut in government spending would directly reduce aggregate demand and an increase in income tax would reduce disposable income which in turn is likely to reduce aggregate demand.

    Monetary Policy - The MPC could raise interest rates which will discourage borrowing and consequently reduce spending on consumer durables for example. This will also reduce the amount of disposable income that people have after loan repayments at variable interest rates.

    Assessment - Although both would reduce inflation, they may lead to a fall in growth. Arguably the most effective approach would be to pursue more farsighted supply-side policies which would increase AS and control inflationary pressure this way. There is however a time-lag element involved.
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    (Original post by pwcroberts)
    Are there any effective policies to reduce cost push inflation for a govt
    Cost push inflation is a Keynesian fallacy like all of Keynesian ideas.
    The only real inflation is demand pull.
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    Cost push inflation is valid and worth mentioning in the right situation. The UK economy is experiencing it right now with a variety of commodities shooting up in price in recent years. Eg Palm oil/Wheat/Crude oil - all because of the cost.

    The government can employ expansionary fiscal policy to counter-act cost push inflation. Governments would do this by reducing indirect taxes Eg a reduction in VAT.
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    (Original post by Flinders87)
    Cost push inflation is valid and worth mentioning in the right situation. The UK economy is experiencing it right now with a variety of commodities shooting up in price in recent years. Eg Palm oil/Wheat/Crude oil - all because of the cost.

    The government can employ expansionary fiscal policy to counter-act cost push inflation. Governments would do this by reducing indirect taxes Eg a reduction in VAT.
    This is completely wrong. Expansionary fiscal policy increases inflation even more.

    Increasing interest rates can be used to reduce cost push inflation as when interest rates rise, the currency goes up in value which in turn makes imports cheaper.
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    (Original post by Smeemi)
    This is completely wrong. Expansionary fiscal policy increases inflation even more.

    Increasing interest rates can be used to reduce cost push inflation as when interest rates rise, the currency goes up in value which in turn makes imports cheaper.
    You are talking about demand pull inflation as if you rise intrest ryes then this will likely lead to a wage spiral
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    (Original post by pwcroberts)
    You are talking about demand pull inflation as if you rise intrest ryes then this will likely lead to a wage spiral
    Contractionary monetary policy does lead to a decrease in inflation (demand pull) but it also affects cost push inflation if the country is reliant on imports. If you increase interest rates then for example, the pound will rise in value. This will allow the UK to import raw materials, components - e.g. oil more cheaply.

    This leads to aggregate supply shifting to the right.

    Edit: this may not be relevant to your specification. I'm doing Edexcel, I presume you're doing AQA? Ignore it if you're doing the latter as you may not have to know this.
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    Put into the current context of the UK economy. I'm not sure this would be the best method of reducing cost push inflation. The UK economy is in a considerable balance of trade deficit already. An appreciation of the pound will be even more disasterous for our manufacturing industry and a hit on our international competitiveness for our services industry.

    A short term solution i believe is expansionary fiscal policy to reduce cost push inflation.

    EDIT: Typo
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    (Original post by Flinders87)
    Put into the current context of the UK economy. I'm not sure this would be the best method of reducing cost push inflation. The UK economy is in a considerable balance of trade deficit already. An appreciation of the pound will be even more disasterous for our manufacturing industry and a hit on our international competitiveness for our services industry.

    A short term solution i believe is expansionary fiscal policy to reduce cost push inflation.

    EDIT: Typo
    :rolleyes: Expansionary fiscal policy doesn't affect aggregate supply. So how can it affect cost push inflation?
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    Expansionary fiscal policy = cut in taxes. In this case, if indirect taxes and direct taxes are reduced, this will help consumers deal with cost push inflation in the short term.

    EG if the government cut the tax on petrol (we all know how heavily taxed this is) it will allow consumers to free up money for other uses.
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    (Original post by Flinders87)
    Expansionary fiscal policy = cut in taxes. In this case, if indirect taxes and direct taxes are reduced, this will help consumers deal with cost push inflation in the short term.

    EG if the government cut the tax on petrol (we all know how heavily taxed this is) it will allow consumers to free up money for other uses.
    I don't think you understand what cost push inflation is. It's to do with firms costs of production. Expansionary fiscal policy only affects DEMAND.
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    The cost of petrol is rising due to increased cost of brent crude oil (dwindling resources/various supply issues). This means petrol is rising because of cost push inflation.

    (Original post by Flinders87)
    Expansionary fiscal policy = cut in taxes. In this case, if indirect taxes are reduced, this will help consumers deal with cost push inflation in the short term.

    EG if the government cut the tax on petrol (we all know how heavily taxed this is) it will allow consumers to free up money for other uses.
    Thus, the price of petrol is reduced as consumers find it difficult to deal with the increasing cost of filling up their tank, due to cost push inflation.

    I cannot make this anymore black and white

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