Effects of Inflation

Effects of Inflation

Inflation is the most commonly used economic term in the popular media. A Nexis search in 1996 found 872,000 news stories over the past twenty years that used the word inflation. "Unemployment" ran a distant second. Public concern about inflation generally heats up in step with inflation itself. Though economists do not always agree

about when inflation starts to interfere with market signals, the public tends to express serious alarm once the inflation rate rises above 5 or 6 percent. Public opinion polls show minimal concern about rising prices during the early 1960s, as inflation was low. Concern rose with inflation in the late 1960s and early 1970s. When inflation twice surged to double-digit levels in the mid and late 1970s, Americans named it public enemy number one. Since the late 1980s, public anxiety has abated along with inflation itself.

Yet even when inflation is low, Americans tend to perceive a morality tale in its effects. A recent

survey by Yale economist Robert Shiller found that many Americans view differences in prices

over time as a reflection of fundamental changes in the values of our society, rather than of purely

economic forces.

Economists think of inflation more plainly as a "sustained

rise in the general level of prices." Their concerns focus

on questions such as whether inflation distorts economic

decisions. Very high inflation adversely impacts economic

performance, as evidence from cross-country studies

shows. Likewise, moderate levels of inflation can distort

investment and consumption decisions. Recent U.S.

experience with low, stable levels of inflation, in the range

of 2 to 3 percent, has spurred policy makers to consider

the possibility of achieving zero percent inflation.

Reducing inflation however has costs in lost output and

unemployment during the adjustment. Thus, an important

question is wheth...

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would not allow massive inflation. Americans' feeling of pride in national institutions depends in

part on low inflation or "sound money" as a signal of healthy fiscal and monetary institutions.

Finally, inflation can discourage saving and encourage consumption. It thus is perceived as an

attack on certain moral virtues -- a strong work ethic, deferred gratification -- that support a

healthy economy. John Maynard Keynes made his famous attack on the Victorian virtue of

saving -- always "jam tomorrow and never jam today" -- for economic reasons. Consumption in

a depression or a recession could strengthen the economy, in his view. But British society took

Keynes's mockery as an assault on the core of Victorian morality. Many Americans likewise feel

that inflation assaults the legacy here of the Protestant work ethic that places a moral premium on

saving over consumption. Fighting inflation thus is seen by many as a moral as much as an

economic duty. Americans want their public officials to fight inflation to increase long-term output

and employment but perhaps also to strengthen society's moral foundation.