Inflation: Causes, Costs, and Current Status

Abstract

The costs of inflation are related to its rate, the uncertainty it engenders, whether it is anticipated, and the degree to which contracts and the tax system are indexed.A major cost is related to the inefficient utilization of resources because economic agents mistake changes in nominal variables for changes in real variables and act accordingly (the so-called signal problem).This cost may not have been experienced in the United States during the post-World War II era.1 In this and the following paragraph, all changes in the price level are as measured by the Consumer Price Index. 2 The rate of rise in the CPI per year is measured on a December over December basis rather than a year over year basis.

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