Inflation from a Longer-Run Perspective

The acceleration of inflation since the late 1960s, with its explosion of wage claims and government borrowing requirements, has been dazzling. Interpretations of the current inflation have tended to focus on immediate causes — the role of irresponsible unions or lax monetary authorities (depending on the proponent’s reading of the data and political inclinations) and special features such as Russian wheat purchases and the oil crisis. These factors are, of course, important, but they should not be allowed to divert attention from a disturbing underlying pattern. Looking at the pattern of inflation in the UK and USA over the period since the Korean War as a whole, a steady rise in the inflation rate at the troughs of cyclical swings is revealed. The upswing, taking off from a rising floor, has generated progressively higher peak inflation rates (in the UK the 1956 peak is an exception to this pattern). Table 2.1 gives the data. In my view the recent inflation is best understood as the culmination of a process which began at the end of the Second World War, to which the special factors mentioned above have given added impetus. My thesis is that the root cause of the current inflation is a misapplication of the policy prescription of the General Theory; a policy designed as a short-run remedy has been turned into a long-run stimulus to growth, without examining its long-run implications.