This paper analyzes cost-push inflation and the associated Keynesian policy trade-offs in Serbia and the Western Balkans. The central question is how aggregate demand management performs when inflation is driven primarily by supply-side disturbances rather than overheating demand. Since 2021, the region has faced successive shocks including energy price surges, global supply chain disruptions, and geopolitical tensions that have raised production costs and generated inflation through cost channels. In such circumstances, tighter policy may reduce inflation, but it also slows economic activity and weakens productive capacity. Using a panel dataset covering Serbia and Western Balkan economies over the period 2015–2025, the paper examines the interaction between supply-driven inflation, monetary and fiscal policy responses, and real economic outcomes. Aggregate supply conditions are proxied by indicators of industrial production, labor productivity, unit labor costs, and investment dynamics. The empirical strategy employs panel regressions with interaction terms to capture heterogeneity in policy transmission across countries with different structural characteristics. The results show that restrictive demand management has a statistically significant negative effect on output and supply-side indicators during periods dominated by cost-push inflation, while its disinflationary impact remains limited. These findings suggest that policymakers should clearly distinguish between demand-driven and supply-driven inflation. They also indicate that policy frameworks relying primarily on demand contraction may unintentionally reinforce stagflationary dynamics in small open economies.

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