Inflation and Equilibrium (Methodological Aspects)

Abstract

The definition of inflation as a systematic growth in prices, or a pressure on such growth (to which formula most, if not all, determinations of inflation can be reduced) is methodologically convenient. Because such a definition appears to be unambiguous, the phenomenon measurable, and the results comparable. But the advantages of such a definition exist at the expense of serious defic'iencies. First, the problem of measurability of inflation thus understood becomes much more difficult in the case of economies in which a large portion of the prices are adm nistratively controlled. In such circumstances, the indicators of price increases are usually underestimated, which would not be very important, except that it is hard to find an objective method for correcting them. The techniques of evaluation of the free movement of prices in an economy where a significant proportion of the prices are subject to control are always questionable. Secondly, the comparability of inflation thus defined (in global profiles, or in time series) is only apparent. Especially misleading are comparisons among the countries with different types of economy, unless supplemented with further studies and analyses. For example, increases in price indices in Poland and in Greece have been similar in recent times, although these increases are the outcome of different processes, different market conditions, and so on. Thirdly, not every rise in price is an inflationary rise. An improvement in quality of manufacture or the placement of a new product mix on the market