9 - Inflation

Abstract

Inflation is a term that has been used to mean several different things. It has been defined as a sustained rise in the general level of prices. Two points about this definition need emphasizing. First, the increase in prices must be a sustained one, and not simply a once and for all increase in prices. Second, it must be the general level of prices which is rising: increases in individual prices that are offset by falling prices are not inflationary. To people born since the start of the Second World War, it may seem hard to believe that inflation is not inevitable; however, there have been notable periods of falling prices in the UK during the past three hundred years. In fact, the index of prices in 1913 was lower than that of 1661. During the present century, prices rose sharply during the First World War but fell for most of the inter-war period. The Second World War again saw prices rising rapidly and, in contrast to much of the peacetime experience of the previous three hundred years, they have continued to rise ever since. The 1970s was, for the United Kingdom, the most inflationary decade of the century. The inflation of that decade was unusual moreover not only for its severity but also for being accompanied by historically high levels of unemployment.