Keynesians argue that in a modern industrial economy, many prices are sticky downward or downward inflexible, so that instead of prices falling in this story, a supply shock would cause a recession, i.e., rising unemployment and falling gross domestic product. It is the costs of such a recession that likely causes governments and central banks to allow a supply shock to result in inflation. They also note that though there was no deflation in the 1980s, there was a definite fall in the inflation rate during this period. Actual deflation was prevented because supply shocks are not the only cause of inflation; in terms of the modern triangle model of inflation, supply-driven deflation was counteracted by demand pull inflation and built-in inflation resulting from adaptive expectations and the price/wage spiral.
Monetarist economists such as Milton Friedman argue against the concept of cost-push inflation because increases in the cost of goods and services do not lead to inflation without the government and its central bank cooperating in increasing the money supply. The argument is that if the money supply is constant, increases in the cost of a good or service will decrease the money available for other goods and services, and therefore the price of some those goods will fall and offset the rise in price of those goods whose prices have increased. One consequence of this is that monetarist economists do not believe that the rise in the cost of oil was a direct cause of the inflation of the 1970s. They argue that although the price of oil went back down in the 1980s, there was no corresponding deflation.
The world economy is now slowing down, particularly in the OECD countries. This is blamed on mainly the credit crisis, and the prices of raw materials. Oil has increased by 40% in just a year, and other raw materials such as wheat and steel have seen similar increases. This means that costs increase to manufacturers who use these raw materials in production. Transportation and energy for industry and the service sector will also cost more as oil and gas increase in price. The result is a huge increase in business costs, and this cost is often passed on to the consumer, and so we have cost push inflation. There has been evidence of businesses shedding jobs in order to cut costs, and a number of airlines such as silverjet have gone out of business as a result of high fuel prices.
Cost push inflation as found on infocheese.com