Cost-push inflation can be caused by which factor?

• A. Increase in consumer confidence
• B. Decrease in exchange rate
• C. Improvement in technology
• D. Increase in indirect taxes

Answer: (D)

Cost-push inflation happens when rising costs of producing goods and services push up prices, even if demand isn’t higher. Increasing indirect taxes adds to production costs across many industries (for example, higher VAT or excise duties make inputs and finished goods more expensive). Firms typically pass some of these higher costs to consumers, lifting the overall price level. So, an increase in indirect taxes directly raises production costs, fueling cost-push inflation when it affects the economy broadly.

Other factors described wouldn’t cause cost-push inflation as clearly. A rise in consumer confidence boosts spending and shifts demand outward, leading to demand-pull inflation rather than costs rising across the board. A depreciation of the exchange rate can raise costs via pricier imported inputs, but it’s driven by currency movements rather than a direct increase in production costs like taxes. An improvement in technology lowers costs, which would dampen inflation rather than push it up.