Chronic Inflation - Occurrence and Causes

Occurrence and Causes

Even more so than hyperinflation, chronic inflation is a twentieth-century phenomenon, being first observed by Felipe Pazos in 1972. High inflation can only be sustained with unbacked paper currencies over long periods, and before World War II unbacked paper currencies were rare except in countries affected by war - which often produced extremely high inflation but never for more than a few years. Most economists believe chronic inflation first emerged in Latin America following World War II, with the result that it was originally called “Latin inflation”. Some economists, however, argue that the experience of France in the 1920s was the first case of chronic inflation. Japan (see below) in the years surrounding World War II is another case with characteristics very akin to well-studied cases of chronic inflation.

Early observers from the 1960s and 1970s attributed the ultimate political cause of chronic inflation as powerful group interests with radically divergent policy demands, arguing that the power of labour unions to demand high wages for workers in frequently outdated economic sectors conflicted with the basically feudal political structures of affected countries. Under these conditions, a return to a commodity money that would curb inflation quickly is politically suicidal, with the result that governments affected by chronic inflation have invariably had to resort to more subtle methods of reducing inflation, such as central bank reforms or indexing price and wage levels to the future value of money. This, however, leads to inflation inertia and ultimately to a public that becomes sceptical of attempts to reduce inflation: unlike hyperinflation, history has shown that it is possible for communities to live with chronic inflation relatively easily.

Other sources have argued that chronic inflation is caused by governments seeking to optimise seignorage taxes in order to pay most efficiently for public programmes, or because the societies in which it developed have consistently imported more than they can export and their currencies have had to devalue consistently to make their imports more expensive without elasticity being sufficient to reduce demand. There have on this line also been arguments for demographic causes of chronic inflation as resulting from populations growing more rapidly than production in developing nations from the 1950s to the 1980s, and until today in sub-Saharan Africa.