Contractual arrangements between borrowers and lenders, which can be modified to mitigate the adverse economic effects, pass the burden of price increases to others and make inflation increasingly difficult to control. It takes a long time before interest rates, contractual arrangements, pension schemes, etc, catch up with a given rate of inflation. The lags may be as long as 5, 10 or even 20 years, and thus there will always be distortions and inequities, the more so if the rate of inflation is accelerating. In particular, money rates of interest generally lag behind price rises thus stimulating excessive indebtedness and inefficient allocation of resources. Further, with high rates of inflation there must be much uncertainty as to what exactly the price rise is likely to be over a number of years, and this uncertainty will distort and inhibit long-run lending and investment decisions. It would therefore be quite wrong to conclude that, because the economic costs of inflation in the past have not been readily apparent, they could not quickly become considerable if the gradual but inexorable rise in inflationary expectations were to continue.
The social and political consequences of continuing inflation must also give great cause for concern. They are not easy to pin down because the impact of inflation on individuals and groups is extremely haphazard. Also, under inflationary conditions, income gains and the accumulation of wealth often appear to result not so much from work or sacrifice as from ingenuity and the exercise of economic and political power and influence. Resentment against inflation is incoherent and diffuses through the community. It therefore tends to strengthen other forces making, for disenchantment with government and existing political parties.
[Developing countries] The process of development in the majority of countries is accompanied by continuous inflationary pressure, translated, more often than not, into open and protracted inflation. In part this is because the growth process is driven by the aspiration of the masses to improve their standard of consumption, thus prompting governments to assume entrepreneurial functions and to encourage private entrepreneurs to embark on development schemes that offer a promise of future increases in consumption. The consumption habits of richer economies are adopted by developing countries without corresponding improved production techniques, thus resulting in smaller saving potential.
Further, the adverse consequences for the developing countries of inflation in the developed areas cannot be ignored. The impact of inflation and high interest rates on the net foreign exchange earnings of the developing countries, and on the value of aid and the cost of borrowing in real terms, is difficult to assess. But it is quite clear that successive periods of over-expansion followed by contraction, in the developed countries, greatly complicate the task of economic planning in developing countries. And it is evident that the volume and quality of development assistance has suffered from the fact that donors have so often been preoccupied by problems of domestic inflation, and the consequent balance of payments and budgetary difficulties.
Inflation rose to 1.3% on an annualized basis in the 15-nation European Union in 1999. Inflation was lowest in France and Austria (0.8%) and highest in Ireland (2.8%).
2. Governments have clung to the monetarist promise that low inflation is the precondition for job creation. With inflation in the industrialized world at a 25-year low in 1993 and unemployment at a post-war high, it increasingly appears as though low inflation is in fact the cause and result of high unemployment. The UK's unemployment rose by over 1 million in the two years (1990/91) during which inflation was more than halved (9.1 to 4.2%) Disinflation, such as experienced in the USA in 1985, led to a drop in economic growth. The restructuring of businesses to allow for low inflation promotes fluctuations in prices which are independent of government economic policy and continue after pressure to reduce inflation is removed. Because return on tangible assets is depressed, investors sell such assets to buy high-yield securities and induce a wave of debt crises.