Chronic inflation
Encyclopedia
Chronic inflation occurs when a country experiences high inflation
for a prolonged period of time (several years or decades) due to undue expansion or increase of the money supply. In countries with chronic inflation, inflation expectations become 'built-in', and it becomes extremely difficult to reduce the inflation rate.
, 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divergent policy demands, arguing that the power of labour unions to demand high wages for workers in frequently outdated economic sectors conflicted with the basically feudal political structures of affected countries.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 tax
es in order to pay most efficiently for public programmes, or because the societies in which it developed have consistently import
ed 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.
Chile
Chile had prolonged inflation for the greater part of the twentieth century. Inflation first became persistent at the tail end of the 1930s as the government began a process of import substitution, rising steady to 84 percent in 1955. After slowing in the late 1950s, inflation rose again under Allende
and peaked anywhere between 500% and 1,000% in late 1973 (which some consider hyperinflation
, though the monthly inflation rate reached 30% for a single month). A 1973 coup d'état deposed Allende and installed a military government led by Augusto Pinochet
. Pinochet's free-market economic policy gradually ended chronic inflation, which stabilised in single figures for the first time in forty-five years. Overall impact of chronic inflation: 1 current peso
= 1,000,000 pre-1960 pesos.
Japan
As Hirohito
prepared for war to gain access to rubber
and mineral resources, Japan began experiencing steady inflation from 1934. By the end of 1949, retail prices were more than 150 times their level in 1939, and the highest denomination was a 75,000,000,000 Yen bank cheque. The Japan wholesale price index (relative to 1 as the average of 1930) shot up to 16.3 in 1943, 127.9 in 1948 and 342.5 in 1951. In the early 1950s, after achieving independence from USA, Japan controlled its own money. Through its rapidly growing export trade, Japan stabilized the yen quickly.
had a turbulent time in 2004, losing nearly half its value and sparking rampant inflation. On 1 January 2005, the Malagasy ariary
replaced the previous currency at a rate of one ariary for five Malagasy francs. In May 2005, there were riots over rising inflation. Disinflation
calmed the situation from 2005 to 2008, but riots ensued in 2009 as prices continued to rise.
Mozambique
Mozambique was one of the world's poorest countries when it became independent in 1975. Mismanagement and a brutal civil war from 1977-92 led to continued inflation. The highest denomination in 1976 was 100 meticals. By 2004, it was 500,000 meticals. In the 2006 currency reform, 1 new metical was exchanged for 1,000 old meticals.
Turkey
Throughout the 1990s. Turkey dealt with severe inflation rates that finally crippled the economy into a recession in 2001. The highest denomination in 1995 was 1,000,000 lira. By 2005 it was 20,000,000 lira. Recently Turkey has achieved single digit inflation for the first time in decades, and in the 2005 currency reform, introduced the New Turkish Lira; 1 was exchanged for 1,000,000 old lira.
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
for a prolonged period of time (several years or decades) due to undue expansion or increase of the money supply. In countries with chronic inflation, inflation expectations become 'built-in', and it becomes extremely difficult to reduce the inflation rate.
Occurrence and causes
Even more so than hyperinflationHyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
, chronic inflation is a twentieth-century phenomenon, being first observed by Felipe Pazos
Felipe Pazos
Felipe Pazos was a Cuban economist who initially supported the Cuban Revolution of Fidel Castro, but became disillusioned with the increasingly radical nature of the revolutionary government. Born in Havana, Pazos earned a doctorate from the University of Havana in 1938. He was a member of the...
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
War
War is a state of organized, armed, and often prolonged conflict carried on between states, nations, or other parties typified by extreme aggression, social disruption, and usually high mortality. War should be understood as an actual, intentional and widespread armed conflict between political...
- which often produced extremely high inflation but never for more than a few years. Most economists believe chronic inflation first emerged in Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
following World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, with the result that it was originally called “Latin inflation”. Some economists, however, argue that the experience of France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
in the 1920s was the first case of chronic inflation. Japan (see below) in the years surrounding World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
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
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as 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
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
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 tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es in order to pay most efficiently for public programmes, or because the societies in which it developed have consistently import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
ed more than they can export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
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
Demography
Demography is the statistical study of human population. It can be a very general science that can be applied to any kind of dynamic human population, that is, one that changes over time or space...
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.
ChileChilean escudoThe escudo was the currency of Chile between 1960 and 1975, divided into 100 centésimos. It replaced the peso at a rate of 1 escudo = 1000 pesos and was itself replaced by a new peso, at a rate of 1 peso = 1000 escudos...
Chile had prolonged inflation for the greater part of the twentieth century. Inflation first became persistent at the tail end of the 1930s as the government began a process of import substitution, rising steady to 84 percent in 1955. After slowing in the late 1950s, inflation rose again under AllendeSalvador Allende
Salvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
and peaked anywhere between 500% and 1,000% in late 1973 (which some consider hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
, though the monthly inflation rate reached 30% for a single month). A 1973 coup d'état deposed Allende and installed a military government led by Augusto Pinochet
Augusto Pinochet
Augusto José Ramón Pinochet Ugarte, more commonly known as Augusto Pinochet , was a Chilean army general and dictator who assumed power in a coup d'état on 11 September 1973...
. Pinochet's free-market economic policy gradually ended chronic inflation, which stabilised in single figures for the first time in forty-five years. Overall impact of chronic inflation: 1 current peso
Chilean peso
The peso is the currency of Chile. The current peso has circulated since 1975, with a previous version circulating between 1817 and 1960. The symbol used locally for it is $. The ISO 4217 code for the present peso is CLP. It is subdivided into 100 centavos, although no centavo denominated coins...
= 1,000,000 pre-1960 pesos.
JapanJapanese yenThe is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
As HirohitoHirohito
, posthumously in Japan officially called Emperor Shōwa or , was the 124th Emperor of Japan according to the traditional order, reigning from December 25, 1926, until his death in 1989. Although better known outside of Japan by his personal name Hirohito, in Japan he is now referred to...
prepared for war to gain access to rubber
Rubber
Natural rubber, also called India rubber or caoutchouc, is an elastomer that was originally derived from latex, a milky colloid produced by some plants. The plants would be ‘tapped’, that is, an incision made into the bark of the tree and the sticky, milk colored latex sap collected and refined...
and mineral resources, Japan began experiencing steady inflation from 1934. By the end of 1949, retail prices were more than 150 times their level in 1939, and the highest denomination was a 75,000,000,000 Yen bank cheque. The Japan wholesale price index (relative to 1 as the average of 1930) shot up to 16.3 in 1943, 127.9 in 1948 and 342.5 in 1951. In the early 1950s, after achieving independence from USA, Japan controlled its own money. Through its rapidly growing export trade, Japan stabilized the yen quickly.
Madagascar
The Malagasy francMalagasy franc
The franc was the currency of Madagascar until January 1, 2005. It was subdivided into 100 centimes.-History:The first francs to circulate in Madagascar were French francs...
had a turbulent time in 2004, losing nearly half its value and sparking rampant inflation. On 1 January 2005, the Malagasy ariary
Malagasy ariary
The ariary is the currency of Madagascar. It is subdivided into 5 iraimbilanja and is one of only two non-decimal currencies currently circulating . The names ariary and iraimbilanja derive from the pre-colonial currency, with ariary being the name for a silver dollar...
replaced the previous currency at a rate of one ariary for five Malagasy francs. In May 2005, there were riots over rising inflation. Disinflation
Disinflation
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down...
calmed the situation from 2005 to 2008, but riots ensued in 2009 as prices continued to rise.