THE Structuralist approach to Inflation
In what way does the demand-pull and cost-push approach to diagnosing inflation not provide a satisfactory explanation of the inflation process?
Let us quickly review each:
Cost push is precipitated by increases in the cost of production factors. What would cause prices of these factors to rise? Mainly demand factors, such as if there is a cost increase (not necessarily because of market related factors) in labour costs for example – the cost of production would rise (with a commensurate fall off in the number of units produced and the number of labour necessary to produce those units, so higher wages for some and unemployment for others). Prices however would rise and quantity demanded will fall (in the short term). This is also true if the cost of the other production factors would rise – such as profit margins, interest rates and rent.
The other cost push factors are the so called “imported” inflation in the form of capital and other goods (oil for example). Decreased productivity (through excessive public holidays, strikes and civil unrest are all factors) that could lead to the cost of production rising with a commensurate shift of the supply curve to the left leading to higher prices and lower quantities consumed across the board in all sectors of the economy – i.e. inflation – cost push inflation.
Demand pull inflation on the other hand occurs when the aggregate demand of goods and services increase across the board, while the supply may stay the same. This could be the result of increased wages, lower interest rates, social spending, rises in export commodity earnings (C,I,G,X).
On their own both these causes do not explain fully what causes inflation to be continuous and considerable (over 1%-3%). Theses factors should work themselves out very quickly if there were no other factors.
It is here where the STRUCTURAL APPROACH to explaining the phenomenon can help.
Once we have dealt with how the underlying, initiating and propagating factors all add to the problem we will pinpoint the root cause – government control and mismanagement of the money supply.
Just before you leve the topic - look at this: https://sites.google.com/site/inflationsa/home
A nice set of slides (one has to realise that these are for beginners where "wrong" economics are taught before they get to the real stuff. http://www.scribd.com/doc/106808219/Chapter-8-Introduction-to-Macroeconomics