Built in Inflation

October 13, 2010Inflationby EconomyWatch


As an economic concept of significance, Built-in Inflation is that kind of inflation which evolve from the past events and continues to affect the current economical conditions of a nation. Built-in Inflation that it may also be termed as Hangover Inflation

Nature of Built-in Inflation:
At one particular point of time, Built-in Inflation acts as one of the 3 principal determinants of the current rate of inflation. This very nature of Built-in Inflation can be well-illustrated by the Triangle Model of Inflation, as propounded by Robert J. Gordon. Gordon's Triangle Model of Inflation says that the current rate of inflation is equivalent to the the summation of the Supply-Shock Inflation, Demand-Pull Inflation and Built-in Inflation.
Origin of Built-in Inflation:
The condition of Built-in Inflation one finds today, originated in the past under the continuous influence of a Supply-Shock (Cost Push) Inflation or Demand Pull Inflation.
Some more facts about Built-in Inflation:
  • About Price/Wage Spiral:Price/Wage Spiral offers an insight into the conflicting nature of wage bargain in contemporary capitalism. This situation arises when the workers do not agree on the wage that is given to them by their employer. Rather, they try to safeguard their real wages or obtain a target real wage, by demanding high nominal wages. Hence, if inflation is expected by them or if they have undergone price inflation in the past, then they always demand for high money wages. On the other hand, in an attempt to safeguard the the real value of their profits, the employers transfer the high costs onto the consumers in the form of price rise. This helps the labor class to demand high money wages.

  • What are Inflationary Expectations?The term 'Inflationary Expectations' with respect to Built-in Inflation, has a significant part to play in handling the relationship existing between the employers and workers. In case the expectation of the employers and workers about inflation prevails for longer timespan, it leads to an increase in the current prices and existing nominal wages. This indicates that inflation occurs simply because of the subjective views about the future occurrences. Following the commonly-accepted Theory of Adaptive Expectations, these inflationary expectations evolve, owing to the constant inflationary experiences in the past.
    To sum up, Built-in Inflation is made up of a venomous circle, including both objective and subjective elements, in order to encourage inflation to persist.

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