Inflation

Inflation is a steady rise in the average price and wage level. The rise in wages being high enough to rise costs of production prices grow further resulting in a higher rate of inflation and finally in an inflationary spiral. Perods when inflation rates very large are referred to as hyperinflation.

The causes of inflation are rather complicated, and there is a number of theories explaining them. Monetarists, such as Milton Friedman, say that inflation is caused by too rapid increase in money supply and the corresponding excess demand for goods.

Therefore, monetarists consider due government control of money supply is can restrict inflation rates. They also believe the high rate of unemployment to be likely to restrain claims for higher wages. People having jobs accept tha wages they are being paid, the inflationary spiral being kept under control. This situation also accounts for rather slow increase in aggregate demand.

On the other hand, Keynesians, that is, economists following the theory of John M. Keynes, suppose inflation to be due to processes occurring in money circulation. They say that low inflation and unemployment rates can be ensured by adopting a tight incomes policy.

The costs of inflation depend on whether it was anticipated and on the extent to which the economy’s institutions allow complete inflation adjustment.

The longer inflation continues, the more the economy learns to live with it. Indexation is a means to reduce the costs of some inflation effects: Indexed wages or loans mean that the amount to be paid or repaid will rise with the price level. Indexation is introduced in countries that had to live with inflation rates of 30 or 40 per cent for years. And the more countries adjust their economies to cope with inflation, the closer they come to hyperinflation.. Indexation means that high rates of inflation are much more likely to continue and even to increase.