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Inflation: Th'e Rising'costsof Living on a Small 4, DOCONEITREiUME fp 100 920 SO 012 301 11* - AUTHOR.- . '.Fuller, Robert TITLE . ,Inflation: Th'e Rising'Costsof Living on a Small , . Planet. Worldvatch Paper 34:. -N'4----, ..,.IN,STIT-UtION,, .Worldwatch,Inst.re-Wastingtom*.D.C. , P0B DATE -Jan 80' NOTE . .48p. , ., AZAILABLE FROM Worldw.atch Institute, 1776-t- Massachusetts Avenue, N.W., WastrinOtonv D.C. 20036 4$2.00, quantity ' discounts aviilablel EDRS PRICE MPO1 Plus Postage, PC Not Available from !DRS. DESCRIPTORS Agriculture: Costs:tDepleted Resources: Developed tiations! Developing Nations: Econoai4s: Environmental Infl,gences: Estima+ed Costs: *Futures (of Society); *Global Approach: Government Role: *Inflation :Oconomicsi": *Living StandaLds: Money Systems: *Social Problems: Technological Advancement ABSTRACT' , Global inflation shdhld be viewed more as a sympton of social problems Ulan as'an economic disease that can be cured by monetary and fiscal policy. Social geoblems signaled by inflation 'include exploding demand; rising costs for essential commodities, stagnating prodpctivity, and a decline in the.real standard of livj.ng. Inflation is interpreted is an inCrease in the overall level of nominal prices in the whole econspy. It is significant to note, however, that crucial determinants of well being are often more closely related to prices of particular gogds and se vices than to changes in the general price level. Circumstances lot ch have contributed to global inflation_include rising ene.rç prices, increased government spending, increased momey supplies, and lack of wage and price controls in capitalist nations. New sources of higher prices fnclude increasing energy and food production costs, depleted resources, and, a &earth of tillable aind. Governments will make progress toward controlltng globalInflation if they aim economic policies toward increasinCI supplvand reducing demand, stabilizing population, encouraging conservation and :tecycling; changing wocking conditions to boost Productivi+y,, increasing cpportunikies for competition, and trriving to provide for basiC human neejds in a setting of economic stability. (DB) , :111 *********************************************************************** Reproductions supplied by FDRS are: the best that can'be made', * froM the original documpnt. *************************************** **0*00************************* e ,. If, 090 . rsj "PERMISSION TO'REPRODUCETHIS U S OSPARTINIIIIT OP HIIIALTH. gbol MATERIk.IN HAS BfEN MICROFICHEORLY EDUC011001 MIELPARS GRANTED B 1401ONA4. INSTITUTE OF SOUZATIOS - CC:)0, THIS DOCUPAINT HAS SEEN REPRO- 4h1Q DUCED EXACTLY AS Rtcelyeo FROM. r-4 ISE PERSON OR ORGANIZATION OR IGIN. AT MG II POINIS OF vIEW OR OPINIONS C:11 TO THE ATEO DO NOT NECESSARILY REPRE EDUCATIONAL SENT OFF ICIAt NATIONAL INSTITUTE OF INIAIRMATIpti RESOURCES EDUCATION POStlION OR POLICY NC. CENTER(ERIC)." Inflatiott ' The Risin cost ofLiving on aStn*all Planet Roi:Trt fullei at, Woildwatekt Paver 34 January 1980 S. 1"..0 - Sections of this paper may be reprodured in magazines and newspapers with acknowledgthent to orldwatch Institute. The views expressed are those of the author and do not necessarily represent those of Worldwatch Institute and its directors, of ficer, or staff. 4-, .4 1P4 S. Copynght Worldwatc h Institute, tIto Library of Congress.Catalog Ca'd Number 70 57383 ISBN 0-91(4468-33-X Printed on recycled paw 44 I. Table of Contents , - 0,A 0 Introduction' , 5 b G. What Inflation Is and Is Not ; Inflation's Damages 9 .--Tht.-Eircumstances of -Tuday's-hTflation 18 New Sources of Higher Prices 27 s'Steps Toward a Noninflationary World Economy 33 Noce., 43 Ik II '111 introduction a he invention of money was surelyone of the most* momen- tous infiovations in history.It belongs in the company ofa . fundamental developmentsthat. haVe created and shaped human civilization: innovations suchas writing, agriculture, and the domestication of animals. Yet t to sides to every coin. Along with the advantages of money come unexpected problems created by its misuse or mismanagement. Inflation isone suCkstirianticipated phenomenon that has recurred throughout his- tory', on occasion playing a major role in the destruction of societies., . , i , Plato and Aristotie argueaoveri*ays .to-avoid inflatiooinn artd Sao li.C. The Arguments have continued to the present day, until they fill the pages of newspapers and journals, of populatas well as scholarly books. Although there have been inflationary periods throughout history, the current inflation is the first' that is truly worldwide.1 It has coincided with global .economic ,interdependence anda sudden '. awareness of the fragility and finitude of the planet and its resources. lb., As the world has "shrunk," so has the buying power of its currencies. , . The current global inflation is lessan economic disease that can be cured by the clever use of monetary and fiscal policy than it isa symp- tom of deeper problems thardesperately need attention. The phenom- enon of global inflatiOn carries a grave message of utmost importance to .humanity. The world is faced with exploding demand, rising cost curVes, foressentialcommodities,stagnating productivity, anda' leveling offif not an actual declinein the real standard of living. *-A 0 . Examining inflation in this global context,itis possible to identify some historically new biological, physical, and sociopOlitical pressures that are contri1:. uting to rising prices the.worldover. Yet their rela- tionship to thehenomenon of inflation is not as simpleas it might wish to thank Christopher Havin and Circuit Tarkhani fr their imktaticv with the research r this paper, ant C,dvin 1:unkhouser, Jay' Greenberg, Alia . ,Johnson. Robert.Kurtz, Pamela Shaw:and j,indaNarke for reviewing the manuscript I) - appear, since rising prices of individual comModities do 'not neces- sarily ,cause inflation. The case can be made, however, that inthe' circumstances of today's,world, rising costs of partiCular commodities , put upward pressure on trie prices of almost everything else,'and! A thus do contribute to inflation. Rising prices, unwelcome as they are,. at the Same time are signal's bearing vital infors'mation. It is important to track down the sources of thbse signals, rising as they now are in crescendo, to decipher 'their meaning, and to set forth their implica- tions for economic policy. , What inflation Is and Is Not During the seventies, inflation became a worldwide 'phenomenon: (See Table 1.) It is now persistent and substantialidmost parts of the globe. Not even the centrally plannyd economies, where pricesare seliby fiat, have been free of it. Estimates.set Soviet inflation at about 5 Oetcentper year during the fir,st half 'of the ssventieg There are numerous signs that since then it has/ increased 7both in -tbe USSR and in Eastern Europe. Bulgaria, kr exhmple, hasrecently decreed 30 to 40percent price increases cm a wide range of goods and services, including basic foodstuffs. And in China, there, has just beenan "upward adjustment" qaf as much as33percent in thepricesof many foods.2 A Iclok at the U.S. Consumer Price Index (CPI) over the last180years shows that, historically, inflation and wars. have gone hand in hand. (See Figure 1, pages24-25.)Prior to World War II, inflationary peri- ods did not outlast wartime by muchinflations br'ought bywars were followed by compensatory deflations. The steady rise in the CPI since World War U, and the steep acceleration after the Vietnam War, indi- cate that the-old rules have changed: Inflation in the United States, as in the rest of the world, appears tZ) be'chronic and accelerating, per- sisting in the face of all attempted remedies. gven ina bartereconomy, relative "prAs1,of various goods change. For example,in certain recently deforested parts of India,one load of firewood'might havebeen, tradetl for one sack of riceten years ago, "Inflation in the United States, as in the rest of the world, appears to be chropie and accelerating, periisting in the face of all attempted remedies!" 4!, Table 1: Average Annual Rate of ehange of Consumer Prices, Selected Countries, 1950-79 Country 1950760 1960-70 ,.1970-78 1979* , (percent) 7 Argentina 25.0 23.0 117.2 440 Australia 2.8 2.5 '10.6 8 Brazil', - 45.0 28.3 52, Canada. e' 1.2 2.7 7.6 9 Egypt -0.6 3.7 7.9 10 FrAnce . 3:4 4.1 9.0 12 India 2.3 6.4 7..4 10 .Indonesia - 17.0.. 20- Israel 8.4 5.6 29.4 .° 93 Japan 2.7 5.9' 9.8 - 8 Kenya , .1.6 12.3 25 Malaysia -1.4 1.1 4 6.1 .5 ..r Mexico 6.0 2.8 15.1 19 .Nigeria 4.1 2.8 9.7. 30 Saudi- Arabia - 1.7 i 14,7 15 Sweden 3.0 4.1 8.9 8 ,United Kingdom 2.4 4.0 13.2 16 United States .1.4 2.8 6.7 13 West Germany. 1.1 ( 216 5.2 , 5 Yugoslavia- 5.0 i 12.4 17.0 24 ' - `I C . *Preliminary estimates by Worldwatch Institute, based on IMF data and current period- icals. Source: International Monetary Fund. but for two sacks today. The relative. -price- of firewriod in terms of rice has doubled as firewood has becomescarcer. The relative prices of godds change all Ai time-ina money economy pr a barter economy-as functions ofupply and demand. Sometimes changes like the e are referred to as instances of inflation: in the above example, someight say thato"firewood prices inflated 100 percent." But this isa cousing use of the word. The inflation irate in an econ- omy, is rather the rate at which the general level of prices in that t 4 . economy 'is changing. In order to calculate this general price level,a money economy i's necessary. Then the _total cost of a representative bundle of' goods and servicecNcan be determined. The resultingnumt, ber isthe. CPI and it brovidesa ,quantitative measure-of inflation. The percentage change in the CPImay be taken a's-the tate of inflation over a)given time interval. hundred,ytais ago, philosopher David Hume imagIned that the quantity of moneyin an economy is doubledat the same time that all prices, rents, wages, and so on are doubled.
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