Discuss the importance of each of these factors, and any other factors that you think are important, in explaining both long-run and short-run variation in the inflation rate.

The main cause of ongoing inflation is ongoing money supply growth (in excess of the growth rate of money demand, which is determined primarily by the growth rate of real output). The weak labor market, reduced export demand, and moderation of medical costs all seem to be one-time events. Thus, they can have no effect on the long-run inflation rate, although they may have some temporary effect on inflation. In addition, these temporary factors can have no long-run effect on the price level, meaning that any temporary effect on the inflation rate for 1992 will be reversed in the future. Thus, these factors at most have a minor effect on the timing of price level changes without any cumulative, long-run effect.

An increase in productivity is somewhat different. It raises real output and thus increases the demand for money, which tends to lower the price level. If the increase in productivity is a permanent, one-time event, then it leads to a permanent, one-time reduction in the price level. A permanent increase in the growth rate of productivity would lead to a permanent reduction in the rate of inflation.

The immediate cause of inflation is excessive money growth. Excessive money growth is related to state-owned enterprises because the losses incurred by these enterprises were covered by subsidies that were a drain on the government budget. The governments resorted to money creation to raise the revenue needed to finance these subsidies. The failure of the recent auction deprives the government of revenue that could be used to pay back wages and raises the possibility of further money creation in the near term. (It may also result in reduced confidence in future privatizations and an increase in longer-term inflation expectations.)