Inflation

Inflation, in economics, decline in the value of money, which implies a general increase in the prices of commodities and services. Deflation means the opposite—generally falling prices, usually accompanied by lower profits and fewer jobs. Times of mild inflation are usually characterized by high employment, with factories producing near their capacities to capture the increased amount of currency available. Once full employment has been reached and factories begin operating at or near capacity, however, additional increases in national spending drive prices higher at a rapidly increasing rate. The reason for this is that a relatively static amount of goods and services is being “chased” by an increased number of dollars. Further increases in spending or shortages in goods and services lead to rapid inflation. Industries raise prices because their costs are going up. In turn, labor asks for higher wages to offset the increase in the cost of living. Extreme inflation can lead to major disruption in the social order. People buy property, stock, or commodities, expecting a rapid increase in value. Prices can rise out of proportion to real value. In the United States, inflation averaged less than 1% yearly during the 1950s and about 3% in the 1960s. Since then, inflation has been considerably greater, averaging over 6% for 1970–77, with periods of double-digit (10% or greater) inflation at the end of the decade and into the 1980s. Government attempts to limit the impact of runaway inflation through monetary and fiscal policies, as well as “jawboning,” that is, making public speeches to apply political pressure to corporations and labor unions to act in the public interest. Similar tactics, as well as the limited power of the presidential veto, can be used against congressional spending proposals that are deemed inflationary.

See also: Economics.