Inflation

INFLATION IS AN ECONOMIC situation in which the average price level of all goods and/or salaries rises steeply, which affects most severely those with fixed or relatively unresponsive incomes, such as pensioners. Inflation decreases consumer purchasing power and lowers national savings rates. When inflation comes during a time of high unemployment, it means a crushing burden on those whose income is already decreased. It favors the debtor at the expense of the creditor, since repayment will be made in depreciated money. The decline of real wages and real savings exacerbates many economic and political conflicts. If inflation results in the rise of prices by a few percentage points per year, then it is only a social irritant.

German inflation in the early 1920s had a significant impact on the poverty level in the country, as the rate of price inflation reached several hundred percent per year. The level of prices often doubled in a day, or even an hour. In 1923, one U.S. dollar was worth 4.2 billion German marks. In the United States, inflation was observed in all periods of business cycle expansion. After every war, countries experienced inflation: the Revolutionary War, the War of 1812, the Civil War, World Wars I and II, the Korean War, and the Vietnam War.

From 1900 to 1958 consumer price levels in the United States quadrupled, and they doubled between 1938 and 1958. Starting from 1945 wholesale prices increased by 52.6 percent, and consumer prices rose 33.7 percent. After the Vietnam War, inflation became progressively worse. This shocked workers, as real take-home pay had been rising steadily.

A new disturbance in the world economy began with a fresh surge of inflation in industrial countries at the beginning of 1979. In the first four months of 1979, wholesale prices in the major industrial countries rose at an annual rate of 11 to 13 percent, compared with five percent in 1978. Price rises in the United States were a result of the sharp depreciation of the U.S. dollar from late 1977 to the end of 1978. The oil crisis was [Page 551]to some extent brought on by this renewed inflation and the depreciation of the U.S. dollar. In 1975 the official U.S. government statistics show that 25.9 million Americans were living below the government-defined poverty level ($5,500 annual income).

Inflation declined sharply during Ronald Reagan administration's term from 1980 to 1989. There were two reasons for this: the high value of the dollar reduced the cost of imports and forced high-wage production in the United States (for example, automobiles and steel), and high interest rates brought about recession. However, the common effect of inflation and depression brought lower real salaries to the largest portion of American workers in the period from 1965 to 1981. Each extra percentage point of unemployment was accompanied by decline of at least two percent in real output, or $700 per household.

During the same period, the inflation rate was accelerated in many developing countries. In 1983 Brazil's annual rate of inflation was nearly 300 percent. Ar-gentina's inflation rate was even higher than Brazil's. However, Mexico, through strong efforts, had reduced inflation from nearly 100 percent in 1982 to 55 percent in 1983. Such events just confirmed that the countries that had been dependent on foreign borrowing must be careful in monetary policy implementation. Borrowing abroad, rather than increasing domestic savings, produced the kind of debt crisis that occurred later in Argentina.

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