What causes permanent increases in inflation?

Question

Temporary changes in inflation lead to adjustments in the price level, What causes permanent increases in inflation and why?

Answer 1

There are no permanent changes in inflation. There are only changes that last longer than others.

That said, the expectation of inflation leads to economic decisions that anticipate that inflation and hence tend to make it real. Correspondingly, the expectation of a decrease in inflation would have the same effect.

However while the feedback is real, the results are not always the same. Sometimes the expectation of inflation can lead to a spiraling increase in inflation rather than a single simple step increase.

Theory has it that inflation can be caused by too large a supply of money which is often caused by governments deliberately increasing the money supply for political reasons. In theory, again, continued government behavior of this sort could lead to long term inflation, but in practice no government has shown the restraint, ability, or life to make such inflation steady. (Either circumstances change, the government changes, or inflation goes out of control.)

Answer 2

Keynes created his theories between the 2 world wars, where tight labour markets weren't a concern. Basically Keynesians assume that the Supply curve is relatively flat, you can hire more people at a modest cost. Therefore, to boost output, you simply increase demand. In the extreme case, if the supply curve is totally flat, then prices don;t increase, but in general even extreme Keynesians would expect some inflation. Monetarists, on the other hand, rose when supply was tight, around the oil shocks where inflation was rampant. They believe that supply is kind of fixed at natural rate of unemploymeny in the long run, and the more recent ones believe in the role of prie expectations. To them if people anticpate a certain rate of inflation this is built into their wage demands. Hence if you practice a keynesian increase in demand, people anticipate inflation (supply is relatively fixed) build that into their wage demands, and supply curve also shifts up, eventually leading to equilibrium at the same natural rate of unemployment but higher price levels. Hence they advocate well publicised monetary policies to keep everything smooth. WHen you talk about more people becoming employed and affecting demand, the aggregate demand curve takes that into account. Income/output is on the x axis, so income increasing which increases quanity demanded, a movement along the aggregate demand curve rather than a shift. Unless you have say sudden migration, then that would shift the aggregate demand curve. Hope that helped to get you thinking.