I like this article about the wrong kind of inflation by Roger Bootle
Or as his cleaner said:
“It’s not the inflation they need to sort out, Mr Bootle, it’s the rising prices!”
Essentially, the wrong kind of inflation is cost-push inflation. This inflation is due to rising costs of production, such as rising energy prices, rising transport costs, imported inflation and rising food prices. This inflation causes a shift to the left of short run aggregate supply. A simple SRAS / AD diagram shows how this kind of inflation also causes a fall in real GDP.
The wrong kind of inflation
Cost push inflation, causing rising prices and falling real GDP. (note some textbooks may show SRAS as a straight-line, but the principle is the same)
This wrong kind of inflation leads to a fall in living standards. Since 2008, the UK has seen a fall in real wages. We have had the worst of both worlds – rising prices, but falling incomes (or at least stagnant incomes)
This bad type of inflation doesn’t cause a rise in wages. But, a fall in real wages. We may laugh at Mrs Bootle’s cleaner, but in a way she might be trying to say, inflation isn’t a problem, if money wages keep up. If money wages grow faster than inflation, then we can afford the rising prices. Our income has increased to meet the higher cost of living.
