Civil Engineering Reference
In-Depth Information
again during 2011. Consequently, other explanations of inflation developed. A
common feature of these explanations is the focus on changes in business costs
caused by factors such as wage rises, widening profit margins or increased import
prices for raw materials.
Let's consider oil prices, as they have a history of rising rapidly. For example, oil
prices trebled in 1973-1974 following action by
OPEC
to limit oil production. They
more than doubled in 1978-1979. Thirty years later a similar saga played out, with
crude oil prices rising from around $30 a barrel at the beginning of the 2000s to
more than $100 a barrel in July 2008 and again in 2011. In each instance, most oil
importing countries experienced periods of inflation. This is because petrol, propane
(LPG), diesel and kerosene (jet fuel) are all derived from crude oil, and oil is also
used in the manufacture of chemicals, plastics, fertilisers and textiles. In short, the
lifeblood of any developed economy is oil. As the price of oil increases, the costs of
production are pushed up, which, in turn, are passed on to the consumer in the form
of higher prices. This phenomenon is known as
cost-push inflation
.
Two closing reflections on these periods of oil price instability put the problem
of cost-push inflation into a sharper focus. First, one response has been to make
energy efficiency an important criterion when designing buildings, and experiments
based on passive solar design and other renewable technologies have emerged.
Second, alongside the search for alternative energy sources, the increasing cost of
oil provides the necessary impetus to develop oil fields that previously were not
economically viable, such as those below the ocean bed in seas that exceed a depth
of 2,000 metres off the shores of Africa and Brazil and those that lie beneath the ice
of the Arctic region.
Other solutions to inflationary problems are more oriented towards government
economic strategy, and some of the policies followed in the last forty years or so are
briefly reviewed in the next two sections.
CURES FOR INFLATION
Taking a broad chronological overview, three 'cures' for inflation have been
deployed in turn since 1970:
•
prices and incomes policies
•
control of money supply
•
interest rate manoeuvres.
Prices and Incomes Policies
During the 1970s, the favoured policy device for stopping, or at least slowing down,
cost-push inflation was various versions of wage and price controls. In general
terms, these involved employers, unions and governments getting together to agree
an annual 'norm' for wage increases. The negotiations, however, proved difficult to
manage and, at best, prices and incomes policies only effectively restrained cost-push
inflation for a temporary period.
