Cost-push inflation is where the aggregate supply of an economy has decreased shown from the movement in the aggregate supply curve from AS1 to AS2. 

Sources of a decrease in aggregate supply could be from: 

• Lower productivity levels 

• Rise in anti-competitive behaviour (eg formation of cartels or price-fixing) - Protectionist measures will increase the cost of inputs 

• Increase in wages (eg from a higher minimum wage or inefficient labour economic policies) - Inefficient investment in infrastructure causing bottlenecks and shortages 

• Higher levels of tax and complexity of taxation - which could increase the cost of production and lower future investment 

This position is not ideal in the economy as it results in: 

• Higher price levels - conflicts with the objective of price stability 

• Lower economic growth - conflicts with the objective of sustainable economic growth 

• Higher cyclical unemployment (from lower economic growth) - conflicts with the objective of full employment.

In addition, Government policy options are also limited: 

• RBA could increase cash rate to reduce inflationary pressure but this will lower real GDP further 

• The government could impose a larger deficit to increase economic growth but this will also stimulate further increases in the price level 

An appropriate Government policy response would be to increase aggregate supply through microeconomic reform and promoting productivity. (More details in productivity section)