Short-term Inflation Research Articles

Inflation and the formation of expectations

This paper develops a model of expectations which generates paths that are consistent with observations that an acceleration of the monetary growth rate initially raises and eventually lowers real holdings of cash balances. It introduces a two-part expectations hypothesis where individuals are assumed to form expectations about the entire path of the price level and about the short-term inflation rate. Interaction between regressive and extrapolative elements induces a transitory rise in money holdings during the initial phase of inflation as expectations are that the process will reverse itself. Subsequently, as expectations catch up, the decline in desired holdings induces an overshooting of the inflation rate.

Sur les pressions inflationnistes et les politiques anti-inflationnistes en France

Inflationary pressures and anti-inflationary policies in France Inflation may be conceived of in a general way as a discordance between partial money flows and partial real flows which manifests itself either in the form of price rises which are not reabsorbed in a lapse of lime considered as normal or supportable, or, as an upward pressure on prices which government action prevents from translating itself into an effective rise in prices. Such tendencies towards a lack of adjustment between money and real flows do not appear at the same time in all parts of the economy but are localised in certain zones of activity. Neither have they the same period of action. It is necessary therefore to consider the length of the period of action of inflationary pressures and the zones of activity in which they manifest themselves. It seems therefore, that three types of inflation may be distinguished : structural, or long period inflation ; cyclical, or short period ; accidental inflation. An examination of current inflationary prssures in France leads to the conclusion that these three types of inflation are present in the economy. The structural tendency to inflation in France derives from ; the demographic situation ; the structure of markets for labour and products ; the evolution of the felt needs of the population. They tend to give rise to long term lacks of adjustment between money and real flows either by forcing up the former, or by limiting the growth and adaptation of the latter. France has also been experiencing, during 1956, an investment boom which gives rise to short run inflationary trends. A notable feature of this investment boom is that it concerns productive investments which, for several years, have lagged behind the growth of production. During 1956, the problem of inflation has been aggravated by a series of accidents which tend to increase pressure on prices : the bad weather during the early months of the year which affected adversely agricultural production ; the big increase in defense expenditure ; the Suez crisis. The appropriate measures to deal with these different, and combined, inflationary tendencies, make it impossible to rely on any one type of anti- inflationary policy. An anti-inflationary policy in France must take account of the need to favour long term growth and the elimination of structural inflation without intensifying short run inflationary pressures and, at the same time, of the need to control short-term and accidental inflationary trends without damaging long term growth prospects. Such a policy is necessarily complex and cannot be compared to anti-inflationary policies of an anti-cyclical type. In fact, policies in France tending to attenuate the pressure of longterm inflationary forces have met with a notable degree of sucess in so far as the increase in production and productivity and the reversal of infavourable demographic trends are concerned. But institutional inflationary practices remain intouched. As regards short term inflation, France has not used monetary and fiscal policy to any great extent during 1956. There are various national conditions which explain why this is so. The need to maintain the expansion of production and, therefore, of investments has been given priority. This decision, though fundamentally sound, has, however, been too undiscriminating, particularly in view of the force of accidental inflationary pressures during 1956. As regards the latter, price control has managed to avoid increases in the cost of living index to which wages are linked, if not of the cost of living itself. Budget policy, on the other hand, has not been used to reduce consumption and the increased budget deficit has been financed by government borrowing from the public and, subsidiarily, from the banks. Import policy, with the foreign deficit in 1956, has also helped to damp down inflationary pressures in vital sectors of the economy. But the present rate of loss of reserves cannot be maintained very long.

The Impact of the Federal Budget

shall escape a serious wage-price spiral, leading to collapse, within the coming year and a half. In effect, we believe, this is to assume that throughout this period union wage demands are kept within very moderate limits. No doubt it is incorrect to say that the inflationary pressure on wage levels observable at full employment results exclusively from union behavior; we know from the experience of previous booms that competition will generate it in markets, and the evidence of the past fifteen months suggests that this will be true even under price ceilings. But powerful unions enhance the pressure immeasurably in at least two ways: ( i ) they tend to force increases much larger than those which would take place under competitive conditions in factor and product markets; and (2) they intensify the speed and magnitude of any reaction of wages to a rise in prices, when the latter are free to rise. With price controls rapidly going by the boards, they will now be able to move along both avenues. At the present writing (November, I946), among the agents making for rapid short-term inflation they seem to be the most important as they are the least controllable. If they run wild, the inevitable collapse might create a need for a strong reflationary policy.