Cost inflation


Cost inflation is a process by which the overall price level rises due to increased costs for production and sales of products. A similar problem may arise due to the fact that aggregate supply exceeds the level of demand.

Inflation affects almost all types of company costs. Consider the main reasons for this process. In fact, all organizations use some services, in particular transport, public connections and many others. Often, such products are characterized by price dictates due to the dominance of monopolization. That is, the cost of those services that are used by the company rises, and the manager does not have the opportunity to choose cheaper options. Then the organization is forced to either raise prices for its goods, or work at a loss.

In countries where trade unions exist, cost inflation may arise because of the need to raise wages for employees. However, this is irrelevant for Russia. In our country, at the moment, trade unions have little influence on the relationship between the employer and the employee.

As is known, borrowed funds are involved in the work of most companies. Consequently, cost inflation may arise due to monopolism in the banking sector. Interest rates are rising, and organizations inevitably have to raise their costs, and, consequently, the cost of production increases.

For Russia, inflation costs are very characteristic, due to the excessive tax burden. Why it happens? Often, owners of organizations include taxes in their expenses. Consequently, it is necessary to increase the cost of production to cover all costs.

The reason for inflation are customs duties. At a time when they become more expensive, the cost of the organization’s products or services also increases. It is worth noting that this problem became especially urgent when the law on tax duties between the CIS countries was introduced.

So let's summarize. Inflation is often caused by non-monetary factors. This may be a salary increase that outpaces productivity growth, a mismatch of such factors as aggregate supply and demand. The offer in this case is higher than the demand for it. It is worth noting that cost inflation does not appear due to excess cash. Consequently, it does not immediately devalue the currency.

We give the simplest example of such inflation. There was a serious problem with the road, on which products are delivered to a certain area. Then a bypass is searched. Its length can significantly exceed the length of the first road along which the goods were initially delivered. Consequently, in the area under review, prices for the overwhelming majority of product items soar, due to a significant increase in transport costs of organizations. In this case, businesses usually reduce profitability. In the worst case, they suspend their work altogether due to uncompetitive prices.

Inflation can be open and closed. For a developed market economy with free pricing, the first option is more characteristic. Open inflation implies an unregulated increase in the cost of production. Removing it is relatively easy. Closed inflation is typical for a centralized economy. It is expressed not through price increases, but through a shortage of products. It is rather difficult to fight closed inflation, due to the fact that in this variant there are no natural mechanisms through which a stable equilibrium can be achieved.

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