The costs of inflation

Quarterly Bulletin 1995 Q1
Published on 01 March 1995

By Clive Briault of the Bank’s Monetary Assessment and Strategy Division.

This article surveys the academic literature on the costs of inflation. There are many well-established theoretical reasons why inflation—and uncertainty about future inflation—may reduce economic welfare. Moreover, there has recently been an expansion in empirical work on the relationship between inflation and growth, looking either at a single country or across countries. Most studies have found a significant negative correlation between inflation and growth. And at the broadest level, the article concludes, the available evidence supports the view that well-run economies with strong and efficient productive structures tend to exhibit both low inflation and high growth.

The article also briefly reviews the emerging literature on the costs of reducing inflation, which suggests that the short-term trade-off between unemployment and inflation is more pronounced in countries with low inflation.

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