The General Level of Prices

Abstract

In recent years most countries have discovered that, as the level of activity approaches full employment, prices rise. It is the extent of the price rise which is important. A moderate price rise can be taken care of by compensating poorer persons on fixed incomes, e.g. pensioners. A higher rise, however, becomes uncomfortable because: (a) it may make home goods dear relative to foreign goods, thereby increasing imports and decreasing exports; (b) it may enter into people’s expectations so that they spend cash balances as soon as possible, thereby driving up prices still further. When the rise in the general level of prices is becoming uncomfortable, we can say there is ‘inflation’.