III.

History

Examples of inflation and deflation have occurred throughout history, but detailed records are not available to measure trends before the Middle Ages. Economic historians have identified the 16th to early 17th centuries in Europe as a period of long-term inflation, although the average annual rate of 1 to 2 per cent was modest by modern standards. Major changes occurred during the American War of Independence, when prices in the United States rose an average of 8.5 per cent per month, and during the French Revolution, when prices in France rose at a rate of 10 per cent per month. These relatively brief flurries were followed by long periods of alternating international inflations and deflations linked to specific political and economic events.

By historical standards, the post World War II era has been characterised by relatively high levels of inflation in many countries, and by the mid-1960s a chronic inflationary trend began in most industrial nations. For example, from 1965 to 1978 American consumer prices increased at an average annual rate of 5.7 per cent, including a peak of 12.2 per cent in 1974. In Great Britain, inflation also peaked in 1974, following the quadrupling of world oil prices, at over 25 per cent. Several other industrial nations suffered a similar acceleration of price increases, but some countries, such as West Germany (now part of the united Federal Republic of Germany), avoided chronic inflation. Given the integrated status of most nations in the world economy, these disparate results reflected the relative effectiveness of national economic policies.

This unfavourable inflationary trend was reversed in most industrial nations during the mid-1980s. Austere government fiscal policies and monetary policies begun in the early part of the decade combined with sharp declines in world oil and commodity prices to return the average inflation rate to about 4 per cent.