Temporal Variability of United States Consumer Price Index

Abstract

WITH THE INCREASED LEVELS OF INFLATION in the United States in the 1970s has come an increased interest in the possible costs of inflation. It is generally agreed that if transaction costs are zero, if an inflation is fully anticipated, and if the inflation affects all goods and services equally, then there is no change in individual or aggregate welfare [23, chap. 91 As an example of the thrust of the contention, an equitable contract for an income fixed in nominal terms can be drawn if the inflation rate is correctly anticipated. However, each of the conditions is violated in the real world, and some economists [ 1, 21 1 argue that there are in fact appreciable costs even for an anticipated inflation. Suggested transaction costs that increase with anticipated inflation rates are greater costs from holding less money, the weakening of usefulness of past experience in repeated transactions for the same goods, and the corresponding diversion of managerial talent from production to procurement. There would be a large transaction cost, of course, to pay interest on cash holdings. Other costs are argued to increase with inflation because it is in fact difficult or impossible to make appropriate institutional arrangements. These include increasing the production of goods as opposed to services and avoidance of long-term contracts, with diversion of