Built-in inflation is a type of inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 that results from past events and persists in the present.

Built-in inflation is one of three major determinants of the current inflation rate. In Robert J. Gordon

Robert J. Gordon

Robert James "Bob" Gordon is an American economist. He is the Stanley G. Harris Professor of the Social Sciences at Northwestern University. He is known for his work on productivity, growth, the causes of unemployment, and airline economics.-Education:...

's triangle model

Triangle model

In macroeconomics, the triangle model employed by new Keynesian economics is a model of inflation derived from the Phillips Curve and given its name by Robert J. Gordon. The model views inflation as having three root causes: built-in inflation, demand-pull inflation, and cost-push inflation...

 of inflation, the current inflation rate equals the sum of demand-pull inflation, supply-shock inflation, and built-in inflation. "Demand-pull inflation" refers to the effects of falling unemployment rates (rising real gross domestic product

Gross domestic product

Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

) in the Phillips curve

Phillips curve

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation...

 model, while the other two factors lead to shifts in the Phillips curve.

The built-in inflation originates from either persistent demand-pull or large cost-push (supply-shock) inflation in the past. It then becomes a "normal" aspect of the economy, via inflationary expectations and the price/wage spiral

Price/wage spiral

In macroeconomics, the price/wage spiral represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. Thus, this process is one possible result of inflation...

.

• Inflationary expectations play a role because if workers and employers expect inflation to persist in the future, they will increase their (nominal) wages and prices now. (See real vs. nominal in economics.) This means that inflation happens now simply because of subjective views about what may happen in the future. Of course, following the generally accepted theory of adaptive expectations
  Adaptive expectations
  In economics, adaptive expectations means that people form their expectations about what will happen in the future based on what has happened in the past...
  
  , such inflationary expectations arise because of persistent past experience with inflation.

• The price/wage spiral refers to the adversarial nature of the wage bargain in modern capitalism. (It is part of the conflict theory of inflation, referring to the objective side of the inflationary process.) Workers and employers usually do not get together to agree on the value of real wages. Instead, workers attempt to protect their real wages (or to attain a target real wage) by pushing for higher money (or nominal) wages. Thus, if they expect price inflation - or have experienced price inflation in the past - they push for higher money wages. If they are successful, this raises the costs faced by their employers. To protect the real value of their profits (or to attain a target profit rate or rate of return on investment), employers then pass the higher costs on to consumers in the form of higher prices. This encourages workers to push for higher money wages.

In the end, built-in inflation involves a vicious circle of both subjective and objective elements, so that inflation encourages inflation to persist. It means that the standard methods of fighting inflation using monetary policy

Monetary policy

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

 or fiscal policy

Fiscal policy

In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

 to induce a recession

Recession

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

 are extremely expensive, i.e. they can cause large rises in unemployment and large falls in real gross domestic product. This suggests that alternative methods such as wage and price controls (incomes policies) may also be needed in the fight against inflation.