Final answer:
Cost-push inflation is self-limiting because it creates negative feedback loops in the economy. As prices increase, consumers may reduce their spending or switch to cheaper alternatives, putting downward pressure on prices and limiting inflation. For example, if the cost of oil increases, businesses may raise prices, but consumers may look for alternatives or reduce purchases, leading businesses to lower prices in response.
Step-by-step explanation:
Cost-push inflation is a type of inflation that occurs when the cost of production increases, leading to higher prices for goods and services. It is typically caused by factors such as rising wages, higher energy costs, or increased taxes on businesses. When these costs increase, businesses may pass them on to consumers in the form of higher prices.
However, cost-push inflation tends to be self-limiting because it creates negative feedback loops in the economy. As prices increase, consumers may reduce their spending or switch to cheaper alternatives, which can lead to a decrease in demand. This decrease in demand can then put downward pressure on prices and limit the extent of inflation.
For example, let's say there is a sudden increase in the cost of oil, which raises transportation costs for businesses. In response, businesses may increase the prices of their products to cover the higher expenses. However, consumers may start to look for alternative modes of transportation or reduce their purchases altogether. This decrease in demand can eventually lead businesses to lower their prices to attract customers, thus self-limiting the inflationary pressure caused by the initial increase in oil prices.