Cost inflation is a process in which the general price level rises due to the increase in spending on production and sales. A similar problem may arise due to the fact that the aggregate supply exceeds the level of demand.
Inflation affects almost all types of costs of the company. Consider the main reasons for this process. In fact, all organizations use some services, in particular transport, public relations 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 more inexpensive 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, for Russia this is irrelevant. In our country, at the moment, unions have little influence on the relationship between the employer and the employee.
As you know, most companies involved borrowed funds. Consequently, cost inflation may arise due to monopolism in the banking sector. Interest rates are rising, and the organization will inevitably have to increase its costs, and therefore the cost of production increases.
Russia is very characterized by cost inflation due to excessive tax burden. Why is this happening? Often business owners include tax payments in their expenses. Therefore, it is necessary to increase the cost of production in order to cover all costs.
The reason for inflation are customs duties. At a time when they are becoming more expensive, the cost of products or services of the organization increases. It is worth noting that this problem became especially urgent when the law on tax duties between the CIS countries was introduced.
So to summarize. Inflation is often caused by non-monetary factors. This may be an increase in salaries, which is ahead of productivity growth, the mismatch of factors such as supply and demand aggregate. The supply 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 some serious problem with the road on which products are delivered to a certain area. Then a detour is sought. Its length can significantly exceed the length of the first road along which goods were originally delivered. Consequently, in the region under consideration prices for the vast majority of product names soar, due to a significant increase in transportation costs of organizations. In this case, enterprises usually reduce profitability. In the worst case, they completely suspend their work 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. Eliminating it is relatively easy. Closed inflation is characteristic of a centralized economy. It is expressed not through price increases, but through a shortage of products. Closed inflation is difficult to deal with, because in this option there are no natural mechanisms through which a stable equilibrium can be achieved.