osed shop practices, strike threats (and actual strikes; miners, Feb-Mar 1974) and an amenable Government, Trade Unions were able to increase the price of labour beyond proportional increases in productivity. It is the wage price spiral that is the most common feature of cost inflation: an increase in wages that is designed to compensate for an increase in prices will generate a further increase in prices, and in turn a further increase in wages, and so on. Other types of cost push inflation are 1) those created by indirect taxes, but these will only result in a one time increase in inflation, as once prices have increased by the amount of the tax, there is no repeated shock to cause a spiral, and 2) currency devaluation – in 1967 British import prices were raised by around 15%, but, like taxation, it was a once and for all effect.Costs of InflationAgain, for costs there are two main categories of inflation; 1) Anticipated Inflation – this is inflation which is predictable, and hence damage limitation can be exercised to some extent, restricting the costs. Shoe Leather costs – these are incurred when prices are unstable. There is an increase in search time as people try to discover more about prices. Inflation also increases the opportunity cost of holding money, so people make more visits to their banks and building societies, so wearing out their shoe leather. Menu Costs – these are the costs to firms of re-publishing their prices every time there is a definite price increase. They can be particularly damaging to firms who rely on catalogues to send bulky price information to customers. The costs of an imperfectly indexed tax system: if tax thresholds are not changed as nominal wages rise, people who were previously just below the boundaries could actually end up being taxed more than when they were earning less (nominally). Front end loading – this is the cost of ser...
