rong. Inadvertently, some end up winners and others losers. This occurs whether inflation's level goes up or down. Among the losers in the early 1980s were numerous small mills in the forestry industry. These mills bid for timber based on the assumption that inflation would continue to be high. These bids, made primarily for United States Forest Service timber, locked in prices between the purchase and harvest date, usually three to five years. After 1981, when inflation fell dramatically, the real cost of such contracts rose significantly, leaving many firms with contracts for timber they could not afford to harvest. Forestry lobbyists argued that the difficulty in anticipating the dramatic fall of inflation in the early 1980s justified their release from the contractual obligation. In an unusual move, Congress passed a bill, in the early 1980s, directing the Forest Service to renegotiate all timber contracts from the late 1970s, to minimize their impact on small forestry companies. The congressional bailout was highly unusual. Most contracts are not renegotiated. Thus, when inflation is unanticipated, businesses' relative prices can be distorted either because contracts are set and not renegotiated or because it takes time for firms to distinguish between relative and general price changes. This makes it difficult for businesses to invest in a high inflation environment, where relative prices are variable. Firms may misinterpret the ability to raise their product's price as stemming from an increase in demand for their good relative to others, and invest too much. Or they may be less confident that they will earn a return sufficient to pay off debt, and thus may curtail investment. Uncertainty is always present in markets, of course. No one can predict the future. To the extent that inflation even...
