is a type of inflation
that results from past events and persists in the present.
The built-in inflation originates from either persistent demand-pull or large cost-push
(supply-shock) inflation in the past. It then becomes a "normal" aspect of the economy, via inflationary expectations and the price/wage spiral
- Inflationary expectations play a role because if workers and employers expect inflation to persist in the future, they will increase their (nominal) wages and prices now. (See real vs. nominal in economics.) This means that inflation happens now simply because of subjective views about what may happen in the future. Following the generally accepted theory of adaptive expectations, such inflationary expectations arise because of persistent past experience with inflation.
- The price/wage spiral is the adversarial nature of bargaining about wages in modern capitalism. It is part of the conflict theory of inflation. Workers and employers usually do not get together to agree on the value of real wages. Instead, workers attempt to protect their real wages from falling in response to inflation (or to attain a target real wage) by pushing for higher money (nominal) wages. Thus, if they expect price inflation – or have experienced price inflation in the past – they push for higher nominal wages. If they are successful, this raises the costs faced by their employers. To protect the real value of their profits (or to attain a target profit rate or rate of return on investment), employers then pass the higher costs on to consumers in the form of higher prices. This encourages workers to push for higher nominal wages because these price rises raise their cost of living; so the inflationary cycle reinforces itself.
In the end, built-in inflation involves a vicious circle of both subjective and objective elements, so that inflation encourages inflation to persist. It means that the standard methods of fighting inflation using monetary policy
or fiscal policy
to induce a recession
are extremely expensive, i.e. they can cause large rises in unemployment and large falls in real gross domestic product. This suggests that alternative methods such as wage and price controls (incomes policies
) may also be needed in the fight against inflation.
Last edited on 10 April 2019, at 21:29
Content is available under CC BY-SA 3.0
unless otherwise noted.