ABSTRACT
This chapter discusses the problem of inflation. There was inflation in the traditional sense, but many peacetime examples could be found of individual companies or industries with insensitive prices. Price and wage increases would be harmful to the objective of full employment, however, if insensitive prices rose along with sensitive prices. There are two important conditions that are likely to lead to an increase of insensitive prices: a high level of demand in relation to capacity, and excessive wage increases. The chapter explains that when profit margins are too high in relation to wage rates, wage increases or lower prices are in order. Such excessive wage increases are almost certain to lead to increases in insensitive prices. The more widespread the excessive increase in wage rates, the more certain that the individual producer could protect his or her margin by raising prices.
