inflation

inflation in economics, persistent and relatively large increase in the general price level of goods and services. Its opposite is deflation, a process of generally declining prices. The U.S. Bureau of Labor Statistics produces the Consumer Price Index (CPI) yearly, which measures average price changes in relation to prices in an arbitrarily selected base year. While the CPI is usually considered the most reliable estimate of inflation, some economists have questioned whether it overstates inflationary trends.

Inflation results from an increase in the amount of circulating currency beyond the needs of trade; an oversupply of currency is created, and, in accordance with the law of supply and demand, the value of money decreases. Deflation is brought about by the opposite condition. In the past, inflation was often due to a large influx of bullion, such as took place in Europe after the discovery of America and at the end of the 19th cent. when new supplies of gold were found and exploited in South Africa. In modern times wars are the most common cause of inflation, as government borrowing, the increase in the money supply, and a diminished supply of consumer goods increase demand relative to supply and thereby cause rising prices.

Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages diminish. Stockholders make gains—often illusory—from increased business profits, but bondholders lose because their fixed percentage return has less buying power. Borrowers also gain from inflation, since the future value of money is reduced. Deflation, which historically has occurred in the downward movement of the business cycle, lowers prices and increases unemployment through the depression of business. Persistent deflation in Japan, beginning in the early 1990s, has resulted in a drop in consumption, record unemployment, and general economic stagnation. An unusually steep and sudden rise in prices, sometimes called hyperinflation, may result in the eventual breakdown of an entire nation's monetary system. The most notable example is Germany (1923), where prices rose 2,500% in one month.

In the United States, annual price increases of less than about 2% or 3% are not considered indicative of serious inflation. During the early 1970s, however, prices rose by considerably higher percentages, leading President Nixon to implement wage-and-price controls in 1971. Stagflation-the combination of high unemployment and economic stagnation with inflation-became common in the industrialized countries during the 1970s. The costs of the Vietnam War and the social programs of the Johnson administration, plus the oil prices increases in 1974 by the Organization of Petroleum Exporting Countries (OPEC), contributed to U.S. inflation. By the end of the 1970s the Federal Reserve raised interest rates in an attempt to reduce inflation. Following a recession in the early 1980s, there was renewed growth, somewhat lower interest rates, and a decrease in the inflation rate.

During the early 1990s, a downward business turn created an international recession—without significant deflation—that replaced inflation as a major problem; the Federal Reserve lowered interest rates to stimulate economic growth. The mid-1990s saw moderate inflation (2.5%-3.1% annually), even with an increase in interest rates. By the late 1990s, U.S. inflation was low (1.9% by 1998), despite record growth; it has tended to be somewhat higher (roughly 2%-3.5%) in subsequent years, due largely to increases in energy costs and, to a lesser degree, to large government deficits since 2001.

Bibliography: See J. Ahmad, Floating Exchange Rates and World Inflation (1984); A. J. Brown, World Inflation Since 1950 (1985); T. S. Sargent, The Conquest of American Inflation (1999).

inflation In economics, continual upward movement of prices. Although normally associated with periods of prosperity, inflation may also occur during recessions. It usually occurs when there is relatively full employment. Under ‘cost-push’ inflation, prices rise because the producers' costs increase. Under ‘demand-pull’ inflation, prices increase because of excessive consumer demand for goods.

inflation A rise in the general level of prices in an economy which, if it continues, must bring about an increase in the money supply. Economists have offered a number of different explanations for inflation, and though it is generally accepted that excess aggregate demand is typically responsible (‘too much money chasing too few goods’), there is no accepted version of how this situation is created in the first place. A major axis of debate is about whether inflation is demand-led or induced by rising costs. Among the factors said to contribute to the latter are excess money-wage increases, administered price increases, import cost rises, rigidity in the distribution of investment and resources between industrial sectors, and inflationary expectations. What does seem clear is that, although inflation does not affect the real value of average living standards, it tends to redistribute real living standards among groups in an arbitrary way according to their ability to adjust the money value of their incomes to the general rise in the price—level. This engenders social tensions and conflict and these consequences have also attracted the interest of sociologists.

Though early sociological studies of inflation claimed to be addressing unexamined residual categories in economic theory, most later accounts sought not to displace, but rather to supplement the work of economists. The inflation—causing factors emphasized as the basis of difference between inflation—prone and price—stable industrial cultures may be classed as normative and structural. The normative argument, clearly influenced by Emile Durkheim's concept of egoism, is that in a market society, inequalities in income are not governed by some moral standard of a fair day's work for a fair day's pay. They reflect, instead, arbitrary variations in the market power of both individuals and organized groups. The extent to which resentment is engendered will depend on the degree to which there is a general acceptance of individualism and competitiveness as values in themselves. Resentment, in turn, sets off leap-frogging attempts by groups to advance their relative standing.

However, the effect of normative causes will be mediated by various structural factors, notably the extent to which the differential ability of groups to enhance their incomes is stabilized or regulated by law and institutional controls that promote trust between groups; the productive capacity of the economy, especially the degree to which claims are pursued against a surplus that is growing rapidly, or is fixed or increasing only slowly; and whether gains in profitability are reinvested in income-earning industrial capacity or siphoned off into financial speculation whose returns are not enjoyed by the workforce at large.

The best summary of the sociological literature on inflation is Michael Gilbert 's Inflation and Social Conflict (1986)
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