Which scenario describes cost-push inflation?

Cost-push inflation occurs when the overall price levels rise due to increases in the costs of production. This might happen when the costs of raw materials, labor, or other inputs increase, leading to a decrease in the supply of goods as producers are unable or unwilling to produce at previous price levels. When production costs rise significantly, businesses may find it necessary to pass those costs onto consumers in the form of higher prices.

In the scenario indicating increased costs of production leading to supply shortages, it directly ties to the fundamental concept of cost-push inflation. As costs rise, the supply of goods decreases because higher costs can deter production. This mismatch between supply and demand, when demand remains stable or even increases, drives prices higher, which exemplifies cost-push inflation effectively.

The other scenarios do not capture this concept as precisely. For instance, excess production capacity generally suggests that businesses have the ability to produce without increasing costs, which wouldn't lead to inflation. A decrease in consumer spending often correlates with deflation or reduced economic activity rather than inflation. Lastly, higher consumer demand for luxury goods primarily reflects demand-pull inflation, where prices increase due to elevated consumer demand rather than rising production costs.