Inflation

The control of rising prices and the depreciating value of money has been an aim of economic policy for many years. In the past, it was thought that the control of inflation created unemployment and that inflation only occurred at times of full or near-full employment. In recent years, the problem has been much more serious because rising inflation has been accompanied by high levels of unemployment.

A simple description of inflation is too much money chasing too few goods. It poses a serious problem because it has so many bad effects. The first obvious one is that one's money buys less and less as prices of goods and services continue to rise and one's standard of living falls as a result. This is made worse by the fact that people of low and fixed incomes, for example pensioners, are most seriously affected and they are the least able to help themselves.

It is argued by some economists that some inflation is good for the economy, since deflation leads to unemployment and depression, but clearly, a high level of inflation is injurious and makes economic progress difficult, if not possible. Successive governments, therefore, introduce policies which are designed to control inflation. These fall into two groups. The first aims to decrease demand for goods and services. It includes increases in taxation, restriction of credit, and raising of interest rates, all of which reduce consumers' spending power (demand). These measures are usually supported by reduced government expenditure which, in turn, decreases the amount of money circulating in the economy and is therefore a further control on demand.

The second group of measures aims to hold or reduce costs and therefore prices. The chief measure is the carrying out of an incomes policy designed to control wages and salaries at a specified level or specific ones to the level of increased productivity achieved.

Economists talk of, and distinguish between, cost-push inflation -price rises which occur because the costs of production are increasing more than output, and demand-pull inflation - price rises which occur as a result of increased demand. The two types of inflation are closely connected.