Government spending and inflation – Editor
The following extract is from an item written in 2017 by Ellis Winningham about inflation, which appeared in the Facebook page of Prue Plumridge on 31st October 2019.
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The type of inflation that you’ve been made to fear is not the mere increase in the cost of living over a period of many years.
It has a name. It’s called “accelerating inflation”. Accelerating inflation is not the same thing as comparing what a dollar bought in 1982 to what a dollar buys in 2017.
Accelerating inflation is the type of inflation experienced in the 1970’s, and the origins of that episode had nothing to do with government spending. It was a supply-side issue due to the actions of a swing supplier of oil.
Inflation is a continuous increase in the price level over the period of time that one is observing it. Accelerating inflation exists when the inflation rate is rising rapidly over a short period of time. For instance: March 2%, April 3%, May 4%, June 5%, July 6%, August 7%.
As you can see, the inflation rate is not stable, it is not increasing slow and steady over a period of 50 years, it is not the same thing as comparing the cost of living in 1963 to 2017 – it is accelerating, hence the name.
Government spending will not result in accelerating inflation prior to the economy reaching maximum output; that is to say, prior to the ability of the economy to respond to further government spending with increased output.
Every nation has a maximum limit to its production capacity. If government spending were to persistently exceed that capacity, then accelerating inflation from government spending would be a possibility. The problem though in the US, UK, and Australia, is that you first need to employ every, single person who is willing and able to work in order to even reach that capacity. And we aren’t just talking about part-time and low wages. We are talking more full- time jobs at decent wages than there are available workers to fill those jobs. When you get to that point, if the government continues to increase its spending, then you can begin to worry. Not before.