David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Learning Outcomes
By the end of this chapter, you should understand:
0 the quantity theory of money
f) how nominal interest rates reflect inflation
0 seigniorage, the inflation tax and why hyperinflations occur
G when budget deficits cause money growth
0 the Phillips curve
0 the costs of inflation
0 central bank independence and inflation control
0 how the Monetary Policy Committee sets UK interest rates
On its election in 1997 the Labour government made the Bank of England independent, with a mandate
to achieve low inflation.
Sustained inflation is a recent phenomenon. Before 1950, prices rose in some years but fell in others. The
UK price level was no higher in 1950 than in 1920. Figure 22.l shows that the UK price level fell sharply in
some interwar years when inflation was negative. The post-war price level has never fallen. Since 1950 the
price level has risen 20-fold, more than its rise over the previous three centuries. This story applies in most
advanced economies.
The effects of inflation depend on what causes inflation. We start with the causes
of inflation, then examine its effects, which partly depend on whether inflation
was anticipated or took people by surprise. We contrast costs that inflation imposes
on individuals and costs it imposes on society as a whole. We conclude by
considering what the government can do about inflation.
Inflation is a rise in the price
level. Pure inflation means
that prices of goods and inputs
rise at the same rate .
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