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I've been asked what is the detrimental effect on society if there is double digit inflation. Can you help with some examples? I know one would be the increased price of oil in the 1970's. Does double digit inflation normally make prices rise and unemployment increase?

Just the basics is all I need.

Thank you

Cheryl Nafie

-- Cheryl Nafie (DCSID1@aol.com), April 27, 2000

Answers

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Double-digit inflation *is* a rise in the overall level of prices. It *is* a rise in the average prices of commodities by more than ten percent per year.

The principal reason to fear double-digit inflation is that it is almost always rising inflation, and may turn into so-called "hyperinflation." A government cannot live for long with inflation rising higher and higher every year because eventually, as the currency loses its purchasing power, people stampede to get rid of their cash. The stampede leads to a further loss of purchasing power and to the breakdown of the price mechanism: no one is willing to use the government's money for transactions, and people instead barter goods and services. Thus the social division of labor largely collapses: people will only work for those who can provide them with material goods that satisfy their immediate needs. The productivity of the economy collapses as the division of labor breaks down.

Only the most incompetent governments are willing to run a risk of a hyperinflation.

It is less easy to understand why modern governments in industrial countries are averse to stable, moderate inflation--inflation in the high single or low double digits. A general rise in prices enriches some and impoverishes others, but the creditors' losses are the debtors' gains. Those who owe money find their debts less burdensome in terms of real commodities. Those who are owed money find their credits less valuable in terms of the goods and services they can buy.

Yet inflation is very unpopular. People fear not only hyperinflation, but even moderate inflation, like what the U.S. saw in the late 1970s. Some of this fear is a realistic appraisal of the danger that a government tolerating inflation may misstep, and hyperinflation will result.

But even moderate inflation makes life inconvenient. Time is diverted to playing financial games that could be spent more productively. The tax system does not account well for inflation: Some lines of business (such as building shopping malls) become artificially profitable because of the tax system and are pushed well beyond proper limits. And last comes the simple inconvenience of living in a world with a changing price level: Even moderate inflation makes it hard to quickly and easily understand relative costs.

-- Brad DeLong (delong@econ.berkeley.edu), April 27, 2000.