7. The theory of cost-push inflation was initially developed to explain why prices might rise during an economic slump. The theory cannot explain a sustained increase in the rate of inflation, independent of monetary expansion. Two modified versions of the theory are sound. First, since markets do not adjust instantaneously, a sharp rise in the price of an important resource may temporarily cause the rate of inflation to accelerate.

However, the secondary effects of this price rise will eventually place downward pressure on prices in other sectors. Second, a sharp rise in the price of an important resource may lead to economic adjustments that will cause the rate of unemployment to rise. The monetary authorities may follow a more expansionary course in order to minimize the impact of the adjustments on employment. Such monetary expansion can cause a sustainable rise in the rate of inflation.