At any one time, built-in inflation represents one of three major determinants of the current inflation rate. In Robert J. Gordon's triangle model of inflation, the current inflation rate equals the sum of demand-pull inflation, supply-shock inflation, and built-in inflation. "Demand-pull inflation" refers to the effects of falling unemployment rates (rising real gross domestic product) in the Phillips curve model, while the other two factors lead to shifts in the Phillips curve.
The built-in inflation we see now started with either persistent demand-pull or large cost-push (supply-shock) inflation in the past. It then became a "normal" aspect of the workings of the economy due to the roles of inflationary expectations and the price/wage spiral.
In the end, built-in inflation involves a vicious circle of both subjective and objective elements, so that inflation encourages inflation to persist. It means that the standard methods of fighting inflation using either monetary policy or fiscal policy to induce a recession are extremely expensive, i.e., meaning large rises in unemployment and large falls in real gross domestic product. This suggests that alternative methods such as wage and price controls (incomes policies) may be needed as complementary to recessions in the fight against inflation.
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May 08, 2005; When Robert Fathman and Janis Lemke moved into their loft in downtown Lynn last summer, they slept in a vault. Located just off...