Inflation Essay Example | Topics and Well Written Essays - 1500 words - 6

Inflation - Essay Example In case proportionately controlled incomes failed to bring about changes in demand, devaluation of money was used as a means of returning to efficiency. However, the failure of the Bretton Woods model led to a period of higher inflation caused by increases in additional demand. (Charles Bean, 2003, pp 1-4) The Bretton Woods model failed for three main reasons. Firstly, the gold standard exchange endangered the U.S. economy with a convertible crisis and the U.S. took stringent measures, which in effect made exchange even more difficult. Secondly, the adjustable peg system failed to work in the wake of capital mobility, which cause even small changes in parities to become large costs. Thirdly, the countries with a trade surplus were becoming progressively reluctant to adjust. The first world countries were uninterested in revaluating their currencies every time the U.S. had a trade imbalance. This resulted in the waning of the American economic power relative to European countries and Japan. The G10 lost its power and the stage was set for a more individualistic and decentralized system for stabilizing macroeconomic conditions. (Michael D. Bordo, 1993) In the 1980’s all monetary targets were unsuccessful because it was very difficult to predict if the policy goals would reap the intermediate or economic targets. So an inflation target was proposed- and the system converted in 1992. The target measure chosen was the Retail Price Index (RPI), which omitted mortgage payments. The target was set at 1-4% with the expectation that it would come to be so near the end of the parliaments term at office. The adoption of the system of inflation targeting was followed closely by utilitarian systems whereby the Chancellor of the Exchequer and the Governor of the Bank of England met together with their advisory teams and the minutes of the meeting were published in the Bank’s Inflation Report, which analyzed all inflationary trends with the