Who's afraid of inflation?

Prices change all the time, and it is important to distinguish between relative price changes and changes in the average level of all prices. Relative price changes push us to economize on resources which have become scarce, using more of the abundant ones (think petrol vs green energy): they are, therefore, crucial to the effective working of the economy.  In contrast, inflation is a persistent rise in the average level of prices.  

Our study of inflation begins with an understanding of how a price index is calculated, addressing a number of important questions – which goods should be included, how should the index account for new products, changes in buyers’ preferences across existing products (e.g., a shift away from an expensive good towards cheaper substitutes), quality improvements.  The long term behaviour of key price indices is then used to identify a series of key “eras” in economic history, from pre1914 Gold Standard stability, to WW1 inflation, to inter-war volatility (encompassing both hyperinflation and deflation), to the “creeping inflation” of the post-WW II “Golden Age”, to stagflation in the 1970’s and early 1980’s, to the successful control of inflation during the extended “NICE” (non inflationary, consistently expansionary) decade of the turn of the century.  We then examine the causes, macroeconomic implications, and possible policy responses to the switch, within little over one year, from a deflationary environment in which central bank had repeatedly undershot their inflation targets despite using a range of “unconventional” policy instruments to stimulate spending, to the current surge in inflation rates which – by early summer 2022 – has returned inflation to levels not seen for over forty years.  Specifically, course participants will explore the “inexorable and mysterious trade-off” between inflation and unemployment, and its implications for monetary policy and for central bank independence. 

Learning outcomes

The learning outcomes for this course are:

1. A technical and factual understanding of  
      a. how a price index is calculated
      b. conceptual differences between the main price indices used in policy discussions
      c. the long term behaviour of price indices  

2. A historically grounded understanding of the causes of inflation:
      a. The monetarist perspective
      b. The distributional conflict perspective
      c. The imported inflation perspective  

3. A critical appraisal of the current policy debate on the control of inflation
      a. The relationship between actual inflation and expected inflation
      b. The relationship between disinflation and recession
      c. The relationship between central bank independence, accountability, and effectiveness. 

Classes

1. Nominal and Relative Prices, Exchange Rates, Price indices, and Inflation.
This introductory class familiarizes students with the fundamental economic concepts relevant to a discussion of inflation, and with useful sources of statistical information. It also provides an long-term historical overview of changes in the UK price level up to the present time. [Learning objective 1.a-c]  

2. Aggregate supply, aggregate demand, and the price level.
Current discussions of inflation make it clear that Milton Friedman’s simple and powerful description of “too much money chasing too few goods” does not do justice to the complexity of underlying drivers of inflation. Students are introduced to a simple diagrammatic representation of the relationship of aggregate supply and aggregate demand to the inflation rate, and to the most significant shocks which, by shifting either curve, determine the economy’s level of economic activity and inflation rate. [Learning objective 2a-c, 3b]  

3. The costs of inflation.
We discuss the costs and consequences of inflation (and, indeed, deflation), distinguishing carefully between its impact on the effectiveness of market signals and the “anchoring” of price expectations, its re-distributional effects on both incomes and wealth, and the more insidious impacts on social and political cohesion. [Learning objective 3a-b]  

4. Monetary policy from gold to independence to the Dual Mandate dilemma
In this class, we introduce central banks – the public institutions which take the most directly relevant policy decisions affecting the behaviour of the price level.  The emphasis is on identifying and understanding the fundamental ideas behind central bank “instruments” and “rules” across time and in different countries, identifying the common elements behind different terminologies and institutional arrangements. [Learning objective 2a , 3c]

5. The 2022 cost of living crisis
The last class is devoted to a discussion of the impact of the current accelerating rise in prices experienced in the United Kingdom and other advanced market economies. Students will discuss the impact of current and forecast inflation on living standard, the scope for public policy responses, and the constraints which the UK government faces in responding to the electorate’s expectations.

Required reading  

Bell, Torsten a.o. (2022) Inflation Nation. Putting the Spring Statement 2022 in Context”, Resolution Foundation.    

Carlin, Wendy and David Soskice (2005) Macroeconomics.  Imperfections, Institutions and Policies, Oxford University Press ISBN: 9780198776222; Part I, esp. Ch. 2.  

Mcleay, Michael a.o. (2014) “Money Creation in the Modern Economy”, Bank of England Quarterly Bulletin, March (see also the long-run statistical data available from the link).

Typical week: Monday to Friday

For each week of study you select a morning (Am) and an afternoon (Pm) course, each course has five sessions, one each day Monday to Friday. The maximum class size is 25 students. Your weekly courses are complemented by a series of two daily plenary lectures, exploring new ideas in a wide range of disciplines. To add to the learning experience, we are also planning additional evening talks and events.

Evaluation and Academic Credit 

If you are seeking to enhance your own study experience, or earn academic credit from your Cambridge Summer Programme studies at your home institution, you can submit written work for assessment for one or more of your courses. 

Essay questions are set and assessed against the University of Cambridge standard by your Course Director, a list of essay questions can be found in the Course Materials. Essays are submitted two weeks after the end of each course, so those studying for multiple weeks need to plan their time accordingly. There is an evaluation fee of £65 per essay.

For more information about writing essays see Evaluation and Academic Credit.

Certificate of attendance

A certificate of attendance will be sent to you electronically within a week of your courses finishing.