Inflation and Growth

Abstract

Although the relationship between inflation and economic growth has interested economists for some time, the nature of this association is still not well understood. Early discussions deliberated on the relative merits of a rising compared to a falling price level on profits, confidence, investment and other macro variables as these affected the growth of the economy, especially productivity. No noticeable consensus emerged from these deliberations. In more recent times, in particular the post World War II period up until the early 1970s, the historical record gives ambiguous if not misleading clues. For example, cross-country comparisons of rates of inflation and productivity growth in the developed capitalist economies reveal virtually no association between the two. And if the period of rapid growth of productivity of the 1950s and 1960s is compared with the period of stagnation since the early 1970s, over time a negative correlation between inflation and productivity growth is found in each of the economies. The rise in inflation rates is associated with a slowdown in productivity growth.