1. Definition of inflation
   1. Definition Which price index indicates "the" inflation rate?
   2. Definition When does a price rise become "substantial" enough to be a significant problem for economic policy?
2. General Effects
   1. Effect on "real" incomes, purchasing power and money stock, or profits.
   2. The structural distortions and inequities caused by inflation.
   3. Why inflation fears are a perennial bugaboo of economic conservatives (even when there isn't any inflation) -- older & wealthier
3. Birds-eye view of U.S. inflation history
   1. Charts of U.S. inflation back to early 1800's
   2. Charts from Panel 18 (absolute)
   3. Charts from panels 5 & 5B

1. Initiating Causes: the most important erogenous or "structural imbalance factors which have actually INITIATED or EXACERBATED U.S. inflation spirals in recent years.
   1. Total spending greater than the economy's total productive capacity (rarely in peacetime) -- "too many $..."
   2. Sharp increase in monopolistic "administered" prices (e.g. the 1974 and 1979 increases in the OPEC "oil tax" and the recession-induced increases in automobile prices in 1975-75 and 1979-80, & how they spread through economy.
   3. Excessive wage increases
   4. Exchange rate devaluation
   5. Sales tax -- or any tax except income tax
   6. Excessive total borrowing (which increases interest rates and interest costs, as in 1972-73 and 1977-78).
   7. Excessive consumer borrowing (which tends to cause inflationary excess demand in shortage-prone durable goods industries, as in 1955, 72-73, 77-79).

2. Political and institutional factors (which cause supply/demand imbalances and/or prevent price reductions).
   1. Economic instability and policy of using recession & unemployment as "anti-inflation" policy.
   2. Monopolistic market conditions and administered prices (inflexible prices, profit & loss system).
   3. Trade restrictions.

Discussion of structural and institutional factors contributing to the "spiral feedback", where cause & effect are linked in "chicken/egg", "momentum" aspects of inflation; preceded by summary list of initial erogenous causes to be discussed elsewhere.

INTRODUCTION: Interaction of syndromes (define syndromes sufficiently that no sub-intro'd needed below). (see "net result" at end)

1. "Catch-up" Syndromes: "Defensive"
   1. Cost-of-living adjustments (COLA's) and price "indexation". (Brazil?)
      1. Explicit contractual COLA'S.
      2. Invidious relationships: "market-induced" COLA's to maintain "normal" income relationships
      3. Why both are illusory.

      desire vs. ability
      (wages, interest rates)

   2. Cost-plus-fixed-profit-margin pricing practices.
   3. Money supply growth rate (M2.1, 2.2) (But see policy syndromes)

2. Speculative Syndromes: anticipation (both "defensive" and "offensive")
   1. Inflation expectations & "buy now before the price goes up" attitude -Consumers and Business
   2. Speculative bidding-up of the prices of real estate, commodities, and collectibles (speculative hoarding creates real market shortages, double ordering, longer delivery time, a seller's-market increase in prices, credit financing of commodity speculation).
   3. Effect on borrowing
   4. Interest rates
      1. Two mechanisms:
         1. inflation premium
         2. speculative real demand
      2. "Spiral": credit demand, interest rates, interest cost, inflation rate (MR-6A).
      3. Delayed cumulative effect as more contracts are written at higher rates.
   5. Exchange rates.
   6. Anticipation of price/wage "freeze" & subsequent controls ever since Carter elected.

3. The Tax-in-COLA Syndrome
   1. Conflicting purposes of COLAs and the taxes which directly affect the CPI
   2. Tax payments as an indirect part of our STANDARD of living, rather than COST of living.
   3. Effect-on CPI of kind-of-tax shift (since some taxes affect prices & others not).

4. The Savings-in-COLA Syndrome

5. Inappropriate COLA Price Index Syndrome
   1. Inflation bias of CPI
      1. Biased market basket.

6. Structural Syndromes: where the fact of inflation causes a change in structural relationships, which has secondary inflationary effects.
   1. Reduction of bargaining power of consumer & industrial buyers by destruction of comparison-shopping standards of reference for distinguishing between fair prices, bargains, and rip-offs.
   2. Loss of sellers' standard of reference for what is a "fair" or "sound" profit target (short-run "take all the traffic will bear" attitude when a general feeling exists that things are out of control).
   3. Effect-of inflation on profits (as a target for wages).
   4. Inflation adjustment for "real" profits --but capital gains real (compare to housing appreciation). (Example of executive bonuses)
   5. Diversion of entrepreneurial effort towards a search for quick speculative profits and away from economically productive activity (which tens to reduce the growth of productivity.
   6. No solid basis left for long-run business investment planning.
   7. "Two-tier" markets: cat food for the old, Cadillacs for the rich (stimulation of conspicuous consumption of high-price-and-profit-margin luxury goods and services-- big cars, fancy restaurants, NYT ads --by those who gain from inflation. (example of executive pay)
   8. Effect of housing turnover on debt/asset ratios & overall credit balance.
   9. Effect of inflation on net borrowing in relation to current saving -- borrowing financed by increase in income of wealthy.
   10. CPI biases-- change in market basket as result of inflation
   11. Hospital costs--higher costs lead to more complete insurance, which reduces cost-cutting incentives, encourages hospitals to provide more extensive and expensive health care facilities.
   12. The sharper the increase in prices, the worse the structural effect (ex. wheat-land prices, oil & profits)
   13. Increasing concentration of wealth & income.

7. Policy Syndromes: where inappropriate anti-inflation policies exacerbate inflation.
   1. Federal budget cutting which reduces productivity and increases future costs.
   2. Oil price controls (= 5 extra years of gas guzzlers & excessive foreign car imports) (True of all inappropriate price & wage controls, where controls tend to reduce supply &/or increase demand. These are the market distortions emphasized by opponents of controls.)

8. Complex Interactions
   1. OPEC price increases reduce ORE & GNP = reduced productivity & increased labor costs.

"Net result": The longer the inflation is allowed to continue, the harder it is to stop, because of increase in built-in costs (e.g. interest payments) -- reason for "freeze" and controls. Gradualist approach ("patience") won't work without terrible distortions and inequities.

1. Reliance on recessions & unemployment as key anti-inflation policies; inflationary effects of economic instability (e.g. avg. productivity down).
2. Ratchet effect of "sticky" prices & wages (no decrease in price when costs go back down).