A NOTE ON COST INFLATION IN THE U.S.A.
| Author | A. E. Holmans |
| Date | 01 November 1961 |
| Published date | 01 November 1961 |
| DOI | http://doi.org/10.1111/j.1467-9485.1961.tb00169.x |
ANOTE
ON
COST INFLATION
IN
THE U.S.A.
INTRODUCTION
No
recent increase in the American price level has been
so
exhaustively
analysed as that which took place in the years 1956-58, for it raised
important questions both of economic analysis and
of
policy. The
intractability of this inflation to conventional methods
of
control which
relied heavily on monetary policy produced
a
protracted debate as to
whether it was
in
some sense a
‘new’
inflation, brought about by
forces different from those that had
caused
previous inflations.
The debate turned not only on issues
of
fact, but also
on
funda-
mental questions of the nature of inflation,
in
particular
on
the role
of
demand and cost factors. Inflation may take forms quite different
from those implied by
‘
pure demand inflation
’
or
‘
pure cost inflation
’
models.
An
important example
of
a mixture of demand and cost
forces
is
the
structural effect.’ In an economy where factors
of
produc-
tion are not completely and instantaneously adaptable,
it
is
possible
to
have significant excess demand in some sectors
of
the economy at
the same time as a deficiency of demand
in
other sectors. In an
economy where prices are perfectly flexible the
rise
in
prices in the
sectors of excess demand would be offset
by
the fall
in
prices in sectors
of
deficient demand. However, when many prices are not perfectly
flexible, but
on
the contrary are rigid in face of moderate falls in
demand, such
a
shift
in
the structure
of
demand can
cause
an increase
in the price level even in the absence
of
general
excess demand. The
effect is reinforced by the tendency
of
wages and other
costs
to be
pulled up in the sector where there
is
excess demand and for these
increases to
be
transmitted to other sectors, pushing up costs and prices
there. It is reasonable to describe this part
of
the structural effect as
‘
cost in0ation
’.
The same can be said of the well-known phenomenon
of
price increases in sectors where the growth
of
productivity is
relatively low, caused
by
a narrower dispersion
of
rates
of
increase
in
pay than
in
rates
of
growth of productivity. Another effect that
can
be
classified as cost inflation
is
an increase in wage costs that
can
occur
in times of deficiency of demand
as
a result of long-term wage agree-
ments (which may have been negotiated some time before, when
demand tended to excess). One influence
on
the price level that
is
For
the
use
of
the term in this context, see
T.
Wilson,
Inflation,
Blackwell,
Oxford,
1960,
pp.
10s-6.
251
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