Inflation and GDP growth…appreciating the dynamics

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By Ebenezer Ashley (PhD).

The concept of inflation has attracted diverse theories from different economists across the globe. Economists with varied forms of theories on inflation are grouped into two. These include structuralists and monetarists (Nitisha, n.d.). Structural economists assert, inflation is the end-product of the imbalances inherent in economic systems; and adapt both fiscal and monetary policy measures in their attempt to address economic challenges. Monetarists identify monetary factors as the main causes of inflation within an economy and proffer monetary measures towards control of inflation phenomenon. Nitisha (n.d.) noted the existence of three main theories related to inflation, namely conventional demand-pull inflation theory, structural inflation theory and market power inflation theory.

However, it is worth-stressing inherent in these major theories are other forms of theories developed to provide economic meaning to the concept of inflation. Proponents of the conventional demand-pull theory hold the view, the only economic condition that could trigger inflation is when aggregate demand is in excess of aggregate supply. Inflation becomes inevitable when increases in demand are recorded when full employment is in equilibrium. Maximum productive capacity is attained when an economy is found in a full employment condition. At maximum productive capacity, it is difficult for the economy to record further increase in the supply of products and services; while rapid surge in the demand for products and services is recorded. As a result of the apparent imbalance between aggregate supply and aggregate demand, inflation is recorded in the implied economy (Nitisha, n.d.).

Exponents of the structural economic inflation theories are described as group of economists found between the ideological pursuits of conventional demand-pull inflation theorists and market power inflation theorists. Advocates of the structural theory acknowledge the influential role of market power in determining inflation. However, these advocates argued, market power is not the only determinant of inflation within a given economy. The supporters of structural theory are of the firm belief some institutional features of the business environment or structural maladjustments within an economy lead to inflation (Nitisha, n.d.).

The market power theory of inflation was developed around the market power price concept, which refers to the situation where a single seller or group of sellers jointly set a new price that is distinct from the competitive price in the market. The new price is often set to maximise profits of the sellers without any recourse to the purchasing power of buyers or consumers. Market power price has the potential to reduce the consumption levels of households in the low- and middle-income brackets. However, these sellers could maximise profits from consumers within the high income bracket.

Advanced economic explanation on the market power inflation theory asserts, even in the absence of any further increase in demand, oligopolists could increase the prices of their goods and services to any level. A major contributing factor to the price increase is the surge in wage bills often attributable to strong negotiations and bargaining by trade unions within the oligopolistic industry. The increase in production cost due to the increase in the cost of human capital is transferred to the final product or service in the form of higher prices. All things being equal, increases in household income through higher wage-earnings tend to increase their purchasing power; and to stimulate the economy towards increased aggregate demand over aggregate supply, resulting in inflation (Nitisha, n.d.).

Some economists have questioned the effectiveness of monetary and fiscal policies in real life or practical situations since in their view, these policies seldom control rising price levels. These opponents, however, noted the economic usefulness of these policies when rising price levels are instigated by aggregate demand increases. Further, practical application of monetary and fiscal policies to the control of inflation becomes challenging when price increases are at the instance of oligopolistic-industry influence; and the latter, occasioned by a surge in the cost of production, notably labour-input costs (Nitisha, n.d.).

Monetary policies may be effective at taming inflation by regulating the flow of credit within the market. This feat could be achieved through increases in the policy and lending rates to discourage borrowing by individuals and businesses; albeit these measures have limited effect on prices set by oligopolistic markets; as the additional cost of borrowing is transferred to final consumers in the form of higher prices of products and services. In essence, the market power theory acknowledges the presence of inflation even when total aggregate demand is not in excess of total aggregate supply.

The mark-up theory, as propounded by Prof. Gardner Ackley (as cited in Nitisha, n.d.), postulates, inflation arises from the cumulative effect of cost-push and demand-pull activities. Thus, inflation cannot arise from the distinctive factors of cost and demand. Cost-push inflation refers to the inflation that results from the increases in production cost, ostensibly due to wage increases. These production cost increases are transferred to the prices of final products and services. It is likely for some businesses to meet wage increases with reduction in total supply of products and services, leading to higher price per unit of the final products and services.

In the foregoing situations, higher prices per unit in the market are not the result of excess demand over supply, but the result of shortages, strategically created by producers to mitigate the additional cost of labour. The inflation that results from excess demand over supply, which further leads to surge in price levels is referred to as demand-pull inflation. Production is stimulated by the increases in demand; and additional increase in demand for production factors, leading to increases in cost and price.

The mark-up inflation theory identifies the determining factors of both cost and demand. As consumers spend more to encourage economic stimulation, prices of the purchased products and services tend to increase. The foregoing becomes seemingly inevitable as supply falls short of demand in the market. If the goods and services with price increases are sold to producers as inputs, the final cost of production would surge; and this would reflect in the price per unit of the final product and service. On the basis of the foregoing analysis, Prof. Ackley (as cited in Nitisha, n.d.) averred, inflation remains a product of increases in wages or excess demand over supply; and though monetary and fiscal policies are not adequate measures of effective inflation control, a combination of both policies could help policymakers in their stride towards inflationary control.

Another concept adapted to explain inflation is the bottle-neck. The bottle-neck inflation theory as propounded by Prof. Oho Eckstein states, the existing direct relationship between prices of goods and wage rates remains the determining factor of inflation. Stated differently, inflation is recorded when current increase in wage costs; and corresponding increase in prices of goods and services occurs. Prof. Eckstein (as cited in Nitisha, n.d.) noted some deficiencies in clear explanation of inflation by market power or wage-push theories alone. Rather, inflation is encouraged by wage-price spiral and boom in capital goods within an economy. During periods of inflation, prices tend to be higher in every industry. However, few industries end up showing tremendous increase in price than the rest of the industries. The few industries responsible for the hike in prices of products and services are referred to as bottle-neck industries. Generally, concentration of demand for goods of bottle-neck industries leads to inflation.


Inflation remains one of the most commonly-used economic terminologies in contemporary global economies. Further, the concept of inflation is one of the major issues saddled with economies across the globe in prior and recent fiscal periods. For instance, general price levels within the German economy witnessed 5,470% increase during 1922; and increased by nearly 1,300,000,000 (1.3 billion) times during 1923. As of October 1923, cost of postage for the lightest letter sent from Germany to the United States was 200,000 marks. Foodstuffs were not spared from the snare of hyperinflation within the German economy as loaf of bread cost 200,000 marks; cost of butter per pound was 1,500,000 marks; meat was quoted at 2,000,000 marks; and cost of egg was 60,000 marks (Dutta, n.d.).

The increase in price during the period was very fast. This encouraged waiters and waitresses to change prices on the menu several times during the course of a lunch. In some cases, customers ended-up paying for double the price originally stated on the menu when they entered the restaurants. Visual accounts of the narratives during the period revealed a German housewife setting fire in her kitchen stove with German currency notes; and children playing with bundles of German currency notes lumped together into building blocks (Dutta, n.d.).

The decision to monetise debt through the printing of more currency notes led to devastating hyperinflationary levels in Germany, Poland, Hungary and Austria during the first half of the 20th century. Historical dissolution of the Austro-Hungarian Empire led to the emergence of two states, called Hungary and Austria. The Austro-Hungarian Empire lasted from 1867 to 1918. Following the First World War, Hungary and Austria were greatly reduced both in size and power. During the war, Hungary and Austria, then a unified empire (the Austro-Hungarian Empire), was considered the aggressor; and the succeeding states, Hungary and Austria, were indebted to the Allies colossal amounts in war reparations; amidst significant economic challenges such as unemployment, food shortages and significant deficits (Hartley, 2020).

In order to pay off the reparations and address the foregoing economic challenges, the Austrian government sold treasury bills to the Austrian section of the liquidated Austro-Hungarian Bank. Political unrest in Hungary during the same period led to significant budget deficits which the government was impelled to finance through heavy borrowing from the Hungarian section of the liquidated Austro-Hungarian Bank. To address other socio-economic challenges, the Hungarian government increased the volume of low interest loans to private businesses. The massive injection of new notes affected the economies of both Hungary and Austria; as their respective currencies, the Austrian crown and Hungarian krone, experienced rapid depreciation; while prices in the domestic markets rose very sharply. The hyperinflation which ensued encouraged massive capital flights from both Hungary and Austria by local and foreign investors (Hartley, 2020).


After over a century of colonial rule, Poland emerged from the First World War as an independent state. Hartley (2020) described Poland as a country cobbled together from parts of Russia, Germany, Austria and Hungary. In essence, Poland emerged from the three major partitioning powers including the Austro-Hungarian Empire, Weimar Germany and Russia. Further, Poland inherited inflated currencies of these separating powers. Each of these separating powers financed her participation in the First World War through the printing press; and maintained virtually empty treasury at the end of the war (Hartley, 2020).

Due to the quest for autonomy, the fighting in Poland extended beyond 1918; the fighting with Russia extended to the fall of 1920. In an effort to settle the conflict with Russia; settle other border disputes; and to rebuild the country after the devastating First World War occupation, Poland incurred substantial debt. As part of measures to address the economic challenges, Poland resorted to printing of more currency notes; just like Weimar Germany, Hungary and Austria. This initiative weakened the Polish mark. For instance, during 1918, nine polish marks were exchanged for one American dollar. However, as at the end of 1923, one American dollar was exchanged for 6,375,000 Polish marks. The narratives affirmed records of hyperinflation in Germany, Hungary, Austria and Poland during the period under review (Hartley, 2020).

Germany financed her participation in the First World War through deficit spending and suspension of the gold standard. The gold standard refers to the system where the value of a unit of a currency was dependent on the quantum of precious metal it contained; or the quantum of precious metal that could be exchanged for that unit of currency. The prior expectations of Germany were swift and decisive victory; and annexation of wealthier territories to facilitate imposition of reparations on defeated enemies; pay off the country’s debts; and become wealthier after the war. However, actual fall-outs from the First World War were the opposite of what Weimar Germany expected. The country was impelled to accumulate more debt; and to devalue the German mark after four consecutive years of fighting. Weimar Germany ended the First World War with more debts to her Allies in the form of payment of reparations, since the country was on the losing side (Hartley, 2020).

The economic situation of Germany in post-World War One was compounded by the Reparations Commission’s request to Germany to pay, as part of the London Payment Plan, 132 billion gold marks. In response to the foregoing request, the German government printed more currency notes to pay off the country’s debt. This development led to further depreciation of the German mark. During 1922, France occupied the primary industrial region in Germany. This was after Germany had failed to pay an installment owed to France during the period. The French occupation was intended to compel Weimar Germany to honour her financial obligation to France. The German government’s response to the French occupation could be described as a strike action; German workers were offered financial support; and loans were offered at interest rates far below the inflation rate. All these additional measures were financed by printing more German marks (Hartley, 2020).

As at 1923, the value of the German mark relative to the American dollar was actually nothing to write-home about. The German mark was practically worthless as one American dollar was exchanged for 4,210,500,000,000 (about 4.2 trillion) German marks (Hartley, 2020). This exchange rate was astronomically higher than the 6,375,000 Polish marks exchanged for one American dollar during the same period; albeit one may argue dynamics of the German and Polish economies differed at the time; and even today.

During September 2008, the Indian economy recorded an inflation rate of nearly 13%; a rate that was not anticipated during the preceding sixteen (16)- or seventeen (17) years. Although some analysts believed the 13% rise in price level during the period called for concern, it was a little over half the 25% inflation rate recorded during 1974-1975 fiscal period; the highest rate of inflation in India’s economic history (Dutta, n.d.).

Recent happenings in countries such as Brazil, Zimbabwe and Venezuela suggested hyperinflation did not disappear with identified solutions to the challenges of World War One. During the last two decades of the 20th century (1980s and 1990s), Brazil was embroiled in hyperinflation; a challenge that emanated from the country’s resolve to reduce her external debt significantly without raising taxes. The external debt payments were financed through printing of more currency notes. However, this initiative could not sustain rising price levels within the economy. For instance, as at 1990, the average monthly inflation rate in Brazil was 82.4% (Hartley, 2020).

During the latter part of the 1990s and 2000s, the Zimbabwean government adapted varied public spending measures aimed at improving the lot of her citizens. These measures included reviewed pension plans for war veterans and state purchase of white commercial farms, among others. However, Hartley (2020) recounted the Zimbabwean government’s pursuit of these economic measures without meaningful budgets and other pertinent considerations. The government’s initiatives were believed to have induced panic and encouraged capital flight by foreign investors, leading to a crash of the national fiat currency, the Zimbabwean dollar.

Other economic initiatives increased the national debt to assailable heights; while the economy was considered too fragile to grow her way out of the significant national debt. Moreover, imposition of new taxes as strategic way to shore-up government’s revenue was considered politically impossible. To address the conundrum, the Zimbabwean government resorted to printing of more Zimbabwean dollars. The primary objective was to monetise the country’s debt. However, hyperinflation formed part of the rewards from printing of more currency notes by the Zimbabwean government.

The Venezuelan economy and national currency, the bolivar, have been heavily dependent on proceeds from crude oil exports in the last few decades. As a result, heavy fluctuations in world crude oil prices tend to affect stability of the economy and the national currency. The Venezuelan economy experienced stability in total inflows from exported crude oil when world crude oil prices remained stable; and mostly upward adjusting from the late 1990s to the early 2000s. The socialist-driven policies of the late President Hugo Chavez (1998 – 2013) were implemented through deficit financing, following improvements in world crude oil prices; and the hope of the country raking-in more revenues in future to pay off debts contracted to ensure effective development of the economy (Hartley, 2020).

The late President Chavez was succeeded in office by President Nicholás Maduro during 2013. However, in 2014, the world price for crude oil took a nose-dive; and this affected the total revenue streams of many economies including Venezuela who depend on oil proceeds as the main lifeline for pursuit of development and growth programmes. Demand for the Venezuelan bolivar to purchase the country’s crude oil overseas declined, contributing to fall in value of the bolivar. In order to continue from where his predecessor left-off, President Maduro embarked on deficit spending to accelerate national development while efforts were made to pay down the national debt. These and other socialist-driven policies and programmes were executed through the printing of more Venezuelan bolivar.


However, as of 2013-2014, some economists believed the Venezuelan economy was in recession; and therefore, needed pragmatic policies to revive, rather than deepen its woes. As at 2016, hyperinflation had crept into the Venezuelan economy. Inflation rate in the economy was estimated at 80,000% annually during 2018 (Hartley, 2020). Available data on inflationary trends within the Ghanaian economy affirmed the country succumbed to different categories of inflation from 1965 through 2020. The details are discussed in subsequent sections.

The Problem

As noted in the preceding section, inflation has remained a global economic phenomenon for centuries. The concept remains one of the recurring macroeconomic challenges that require constant strategic redress by affected countries across the globe. Historical antecedents revealed some of the world’s wealthiest economies today such as Germany; and other emerging economies such as Austria, Hungary and Poland succumbed to the threats of this macroeconomic nemesis (inflation) over a century ago.


Friedman (as cited in Zivkov, Kovacevic and Papic-Blagojevic, 2020) asserted, growth in gross domestic product (GDP) is stymied by high and volatile inflationary levels. Fischer (as cited in Zivkov et al., 2020) argued, growth is negatively impacted by economic uncertainty arising from instability in macroeconomic factors including inflation. High and unstable inflationary trends within an economy have the potential to escalate inflation uncertainty; and to undermine potential economic growth. Available information on price content is distorted when the economy is characterised by rapid change in inflationary levels. This could have dire implications for efficient allocation of limited national resources for accelerated development and growth (Friedman as cited in Zivkov et al.).

Separate works by Lyziak (as cited in Zivkov et al.) and Caglayan et al. (as cited in Zivkov et al.) contended, firms seldom identify profitable investment opportunities during periods of inflation; as their ability to access and extract useful information on relative prices of goods and services is severely affected. Information inconsistencies and asymmetries heighten during periods of surging inflationary levels; and these increase the costs of external funds to the affected economies. Firms are impelled to postpone or abandon intended fixed investment projects when information asymmetries increase and costs of funds surge. However, the firms’ decision to postpone or abandon fixed investment projects hurts growth of countries as funds needed to ensure economic stimulation are withheld.

The foregoing statement implies inflation has the potential to cause reduction in business investment levels; and to negatively impact on efficient utilisation of productive factors within economies (Andrés and Hernando, 1994). Dorrance (1963) argued, inflation renders the most generally accepted store of liquidity, that is, money and financial assets denominated in money, undesirable sources of protection. This affirms how the traditional function of money and financial assets as store of liquidity is weakened by the advent of inflation. Due to its nature, some economists described inflation as an economic harassment to individuals and businesses within a country. Moreover, these economists perceive persistently high inflationary levels as vital signs of economic management failure on the part of elected governments or otherwise (Hartley, 2020).

The Digest (1997) affirmed, the unquestioned mantra among economists and policymakers across the globe since 1984 has been how to ensure effective inflation control. Andrés and Hernando (1994) asserted, inflation is not a neutral phenomenon and does not favour accelerated economic growth. The foregoing statement suggests inflation may not necessarily be a good companion of economic growth. Data accessed from MacroTrends (2020b) and the World Bank (2021d); and presented in Table 1, column 5; and Figures 3 and 4 reveal, estimated growth in gross domestic product recorded within the Ghanaian economy during 2020 fiscal year was 0.88%. This rate remained 5.6% and 5.38% lower than the respective growth rates recorded during 2019 (6.48%) and 2018 (6.26%). Further, the growth rate recorded during fiscal year 2020 (0.88%) was 7.26% and 2.57% inferior to the respective rates recorded during 2017 (8.14%) and 2016 (3.45%). Respective economic growth rates recorded within the Ghanaian economy from 2011 through 2013 (14.05%; 9.29%; and 7.31%) were comparatively higher than the respective growth rates recorded during 2014 through 2016 (2.9%; 2.18%; and 3.45%).

Average growth rate recorded in Ghana’s economy during fiscal years 1991 through 2000 was 4.30%. This was 2.02% and 3.78% better than the respective average growth rates recorded during fiscal periods 1981 through 1990 (2.28%) and 1971 through 1980 (0.52%); but remained 1.48% and 1.79% worse than the average growth rates recorded during respective fiscal periods 2001 through 2010 (5.78%) and 2011 through 2020 (6.09%). The average growth rate recorded during fiscal period 1961 through 1970 (3.01%) remained the fourth-highest during the ten-year comparative periods (1961 through 1970; 1971 through 1980; 1981 through 1990; 1991 through 2000; 2001 through 2010; and 2011 through 2020).

Further, the average GDP growth within the Ghanaian economy from 1961 through 1970 (3.01%) remained 2.49% and 0.73% superior to the respective average growth rates recorded during fiscal periods 1971 through 1980 (0.52%) and 1981 through 1990 (2.28%). Available data from the World Bank (as cited in MacroTrends, 2021b) on annual global economic growth from 1961 through 2020 and shared in Figure 13 affirm, during fiscal period 1961 through 1970, the global economy recorded average growth of 5.36%. This average compared favourably against the respective average growth rates recorded during 1971 through 1980 (3.87%) and 1981 through 1990 (3.14%); and was about twice the respective averages recorded during 1991 through 2000 (2.81%) and 2001 through 2010 (2.86%); but more than twice the average growth recorded during fiscal period 2011 through 2020 (2.18%).

The general management problem is failure of successive elected governments or otherwise through their respective economic management teams, to institute measures that would assure stability in fiscal and monetary policy implementation, so growth recorded during annual economic activities may not be considered as transient, but sustainable; and capable of contributing meaningfully to accelerated development and growth of individual economies; and the global economy as a whole.

Inflation interacts with the major determining factors of gross domestic product; and interacts with many microeconomic and macroeconomic development indicators such as industrial production, retail sales, unemployment rate, and general behaviour of consumers within economies. The foregoing infers the possibility of an interactive relationship between inflation and GDP growth; and the likelihood of weak monetary policies leading to higher inflation rates; and the latter resulting in unsustainable growth within global economies. Though evidence of the foregoing phenomenon exists, there are limited recent scientific inquiries to establish, clearly, the implications of rising inflationary levels for accelerated and sustainable economic growth within the Ghanaian economy; and within the global economy.

The specific management problem relates to how respective economic management teams of successive elected governments or otherwise could identify and apply exact or appropriate monetary policy strategies that would ensure flexibility created in individual economies and within the global economy through the contribution of inflation to expanded investment; and availability of capital for accelerated expansion of real national and global outputs remains beneficial rather than harmful; ensure inflation becomes an instrument of accelerated development and growth, rather than inflationary control being an object of monetary policy; and to ensure price increases at the instance of influence from oligopolistic-industries do not undermine effective inflationary control measures. The purpose of this research was to assess the effects of persistent rise in annual inflationary levels on annual economic growth.

Author’s Note

The above write-up was extracted from recent Publication on “Nexus between Inflation and GDP Growth” by Ashley, Andani, Sackey and Ackah (2024) in the International Journal of Business and Management (IJBM). DOI No.: 10.24940/theijbm/2024/v12/i1/BM2401-016

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