Cost-Push Inflation Explained: What it Means for Your Business

In business, it’s sometimes necessary to raise the price of goods or services due to an increase in production costs. This might happen because the materials needed to produce your goods have become more expensive, or there’s been a rise in award wages. When businesses increase their prices to maintain profit margins in response to these rising costs, it’s known as cost-push inflation.

In this article, we’ll explain cost-push inflation fundamentals, and provide tips for navigating economic fluctuations. Keep reading to learn more about this topic, as well as common areas of confusion such as cost-push vs demand-pull inflation.

What is cost-push inflation?

Cost-push inflation occurs when businesses raise their prices because the cost of things like raw materials or wages has gone up. These higher production costs can also lead to a drop in aggregate supply—meaning businesses, in general, produce fewer goods. When demand stays the same but there’s less available to buy, prices tend to rise.

This cost-push inflation graph shows how rising production costs can lead to higher prices for consumers, even when demand stays the same.

In most cases, cost-push inflation happens when it becomes more expensive for businesses to make or supply their products. This can be expected or come as a surprise—like when the price of raw materials suddenly goes up. If customers still want the product just as much as before, businesses may increase their prices to cover the higher costs. This helps them protect their profits while continuing to meet customer demand.

A related concept is demand-pull inflation, which happens when more people want to buy a product than there are products available, so prices go up. The essential difference between demand-pull and cost-push inflation is:

• Demand-pull: Prices rise because demand increases
• Cost-push: Prices rise because supply costs increase

Cost-push inflation example: Rising fuel and food prices

Imagine a scenario where fuel prices rise sharply in Australia due to global oil supply issues. This affects transport companies, who now spend more to deliver goods across the country. Supermarkets rely on these transport services to stock fresh produce, meat, and packaged goods.

As delivery costs increase, supermarkets face higher operating expenses. To cover these extra costs, they raise prices on everyday items like fruit, vegetables, and bread.

Even though people are still buying the same amount of groceries, they now pay more at the checkout—not because demand has changed, but because the cost of getting goods to shelves has gone up.

Cost-pull inflation or cost-push inflation: Which is it?

The correct term is “cost-push inflation”. 

Although the term “cost-pull inflation” pops up frequently, it’s actually a mix-up of two distinct concepts—cost-push inflation and demand-pull inflation. Understanding which one you're really dealing with can help you make better decisions about pricing, forecasting, and managing your costs.

Here’s a quick guide:

• Cost-push inflation is driven by rising production costs. If businesses are paying more for raw materials, energy, or wages, and those extra costs are passed on to consumers, you’re likely seeing cost-push inflation.
• Demand-pull inflation happens when consumers are spending more and demand outpaces supply. If prices are rising because goods are flying off the shelves or services are booked out, demand-pull inflation is probably the cause.

Inflation is often influenced by a mix of both. For example, a surge in demand during a busy season combined with a shortage of materials can create a perfect storm of rising prices. Understanding the root cause is key for businesses and policymakers to respond effectively.

What are the causes of cost-push inflation?

Rising production costs often stem from factors outside a business’ control. To stay profitable, many businesses pass those increases onto consumers through higher prices. Here are some of the most common causes of cost-push inflation:

• Wage increases: When workers negotiate higher wages or when minimum wages rise, businesses may face increased labour costs—especially in labour-intensive industries. These costs can be passed on to consumers in the form of higher prices.
• Rising raw material costs: If the price of essential inputs like oil, metals, or agricultural goods increases, it drives up the overall cost of production for many businesses.
• Supply chain disruptions: Natural disasters, political unrest, or global events (like pandemics) can interrupt supply chains, limit access to materials, and raise transport costs—all contributing to price increases.
• Currency depreciation: When the Australian dollar loses value compared to other currencies, imported goods and materials become more expensive for local businesses.
• Government regulation or taxation: New regulations, tariffs or environmental levies can increase the cost of doing business, particularly in industries like energy, mining, and manufacturing.

Cost-push vs demand-pull inflation

This table summarises the key differences between cost-push inflation and demand-pull inflation, to help you understand what drives each type and how they affect prices, production, and the overall economy:

What are the effects of cost-push inflation for businesses

When cost-push inflation takes hold, the rising costs of production can squeeze profit margins and disrupt day-to-day operations. Cost-push inflation effects can be particularly tough for small-to-medium sized enterprises (SMEs) with less pricing power. 

Here are some of the most common effects cost-push inflation can have on SMEs:

• Increased cost of goods sold (COGS): Higher prices for raw materials, fuel, labour or imported components can lead to a direct rise in the overall cost of producing goods or services.
• Pressure to raise prices: To maintain profitability, businesses may need to pass on some of the increased costs to customers—which can risk reduced demand or customer loyalty.
• Profit margin squeeze: If price increases aren’t feasible, SMEs may absorb the higher costs, leading to tighter margins and reduced profitability.
• Cash flow strain: Rising input costs can throw off cash flow forecasts and reduce available working capital, making it harder to manage operational expenses or invest in growth.
• Supplier negotiations and sourcing changes: Businesses might need to renegotiate contracts, seek alternative suppliers, or explore cheaper substitutes to control costs.
• Reduced competitiveness: If competitors are better able to absorb or offset rising costs, SMEs may struggle to remain price competitive in their market.
• Difficult staffing decisions: With rising wage expectations contributing to inflation, businesses may face pressure to raise salaries while also trying to manage higher operating expenses—potentially leading to hiring freezes or cutbacks.

Learn more about inflation’s impact on small businesses. 

Case study: Baker’s Delight

Baker’s Delight is a great case study for cost-push inflation in Australia.

As one of Australia's largest bakery franchises, Bakers Delight provides a clear example of how cost-push inflation can impact SMEs. Like many food retailers, the business has faced significant price pressures due to:

• Increased cost of wheat and flour: Global supply disruptions, especially from Ukraine (a major wheat exporter), combined with local droughts, pushed up flour prices.
• Energy costs: Rising gas and electricity prices increased the cost of baking and operating ovens across hundreds of stores.
• Higher wages: In response to minimum wage increases and inflation-linked enterprise agreements, Bakers Delight (like many food retail businesses) has had to increase staff wages.
• Packaging and freight: Supply chain issues and fuel price hikes raised the cost of packaging materials and logistics.

These cost pressures left Bakers Delight with limited options: reduce margins, pass on costs to consumers, or cut costs elsewhere. Many franchisees opted to raise retail prices slightly while communicating openly with customers about the reasons behind those increases.

Despite these pressures, Bakers Delight has continued to perform strongly, supported by its loyal customer base and adaptive franchise model. By balancing price adjustments with clear communication and operational efficiencies, the business has managed to navigate rising costs without compromising on quality or service—a testament to its resilience in a challenging economic environment.

Strategies to navigate cost-push inflation

While cost-push inflation can place serious pressure on your bottom line, there are proactive steps small and medium businesses can take to manage rising input costs. The key is to stay agile in the face of change. 

Here are several practical cost-push inflation solutions:

• Review and optimise your supply chain: Explore alternative suppliers, renegotiate contracts, or consider local sourcing to reduce freight and logistics costs. Diversifying your supply base can also reduce vulnerability to global disruptions.
• Audit your expenses: Conduct a thorough review of all operational costs. Identify areas where you can cut unnecessary spending or switch to more cost-effective tools, services or subscriptions.
• Increase operational efficiency: Invest in technology or automation to streamline workflows and reduce manual labour. Tools like accounting software, inventory management systems, and customer relationship platforms can boost productivity without increasing headcount.
• Adjust pricing strategically: If you need to raise prices, do so gradually and transparently. Communicate the reasons to your customers and highlight the value they still receive. Bundling products or offering loyalty rewards can help maintain customer satisfaction.
• Monitor your financial health regularly: Use real-time data to track cash flow, profit margins and input costs. Having a clear view of your finances can help you make timely decisions and avoid surprises.
• Stay flexible with staffing: Consider casual or part-time arrangements during uncertain periods. Cross-training team members can also help you maintain service levels without additional hires.

By implementing a tailored cost-push inflation solution, your business can remain resilient in the face of rising costs.

Stay ahead of inflation with smarter business decisions

To manage the impact of cost-push inflation, you need clear visibility over your finances and the flexibility to adapt quickly. With QuickBooks accounting software, you can track expenses, monitor cash flow in real time, and generate detailed financial reports. It’s a powerful tool to help you stay in control—even when external costs are on the rise.

Learn more about how to make your business more resilient.