ABSTRACT
An economy experiencing continuously, rapidly rising prices could suffer both important inefficiencies arising from market distortions and significant welfare losses. Because labour market mechanisms are central to the process of inflation, a discussion of the causes, nature and consequences of inflation is a natural part of any analysis of how the labour market functions. This chapter analyses inflation within the involuntary unemployment model. Such an approach to expectations formation can be criticised in that it assumes that labour market agents have complete statistical information and knowledge of the structural relationships within the economy and the causation underlying them. The cost-push model has many features which seem to fit the real world, but perhaps it lacks the theoretical precision of, say, the VU model. Economists have distinguished between the consequences of inflation which is anticipated and those of inflation which is unanticipated. The distributive consequences of this effect of inflation depend largely on how the revenue is spent.
