Cost Pull Inflation

Explanation:
When price increases due to an increase in factor prices, it is known as cost pull inflation. In this type of inflation, the increase in production costs leads to an increase in the overall price level of goods and services. This inflationary pressure is caused by factors such as an increase in wages, raw material costs, or taxes.

Causes of Cost Pull Inflation:
Cost pull inflation can be caused by various factors, including:

1. Increase in Wages: When the wages of workers increase, it leads to higher production costs for businesses. To compensate for these increased costs, businesses raise prices, resulting in cost pull inflation.

2. Increase in Raw Material Costs: If the prices of raw materials used in the production process increase, it raises the cost of production for businesses. To maintain their profit margins, businesses pass on these increased costs to consumers by increasing the prices of their products.

3. Increase in Taxes: If the government imposes higher taxes on businesses, it increases their operating costs. To cover these additional expenses, businesses raise prices, resulting in cost pull inflation.

Effects of Cost Pull Inflation:
The effects of cost pull inflation include:

1. Decreased Purchasing Power: As the overall price level increases, the purchasing power of consumers decreases. This means that consumers can buy fewer goods and services with the same amount of money.

2. Reduced Profit Margins: Businesses may experience reduced profit margins due to increased production costs. This can lead to lower investment and economic growth.

3. Income Redistribution: Cost pull inflation can lead to income redistribution from consumers to producers. Consumers bear the burden of increased prices, while producers benefit from higher revenues.

4. Wage-Price Spiral: Cost pull inflation can also lead to a wage-price spiral, where workers demand higher wages to compensate for the increased cost of living. This, in turn, leads to further increases in production costs and prices.

In conclusion, when price increases due to an increase in factor prices, it is categorized as cost pull inflation. This type of inflation is caused by factors such as higher wages, increased raw material costs, or higher taxes, and it can have various effects on the economy, including decreased purchasing power and income redistribution.