Aggregate demand, conflict and capacity in the inflationary process

Abstract

This paper focuses on an alternative perspective on inflation to that of the non-accelerating inflation rate of unemployment (NAIRU). It indicates that there are no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures arise from conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. There are supply-side factors impinging on the inflationary process, which arise from the level of productive capacity (relative to aggregate demand). The supply-side constraints are viewed as arising from capacity constraints, rather than from the operation of the labour market. Copyright 2005, Oxford University Press.