The anatomy of inflation: An economic history perspective

In an important sense the present survey reaches a conclusion similar to the one
highlighted by Laidler and Parkin (1975) over forty years ago. Inflation, if fully
anticipated, produces modest social costs. We are no closer to knowing what is ‘optimal’
inflation except that low and stable inflation come closest to reducing the loss of
purchasing power of money. Because prices of goods and services incorporate elements
that are difficult to measure precisely we cannot even be sure what the actual level of
inflation really is. Hence, what is deemed low may well differ across countries and across
time. Nevertheless, avoiding inflation is not only desirable because it represents a form
of taxation without representation but, in theory at least, low and stable inflation ought to
be more easily forecasted thereby reducing the likelihood of large and persistent
forecast errors.