January 22nd, 2021

Inflation, Specific and General

The many causes and effects of inflation

Concerns over a generalized “inflation” loom in the recovery. Yet the prices that most heavily factor into the cost of living for US workers—housing, health, and education—have already been rising for decades. The question we should be asking is whether the extension of the welfare state is the cure for, rather than the cause of, these trends.

Until 1980, the annual rate of change of the Consumer Price Index (CPI), the weighted measure of the cost of a basket of core consumer goods, increased at an accelerating pace in every business-cycle expansion, reaching double digits during the 1940s and 1970s. Inflation—its causes and consequences—was at the heart of economic debates throughout this period, when the discipline of macroeconomics took its current form. While we understand individual industry price changes in terms of supply, demand, and market power, our conceptual tools for understanding inflation remain weak.

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