The Effects of Inflation: How they Persist

Abstract

This article summarizes an investigation of the effects of past high inflation on future performance measures if inflation were to disappear. Computer simulations were used to estimate continuing differences between historical cost and current cost measures and their patterns of convergence over time. Current cost accounting and three combinations of historical cost accounting were applied to an average manufacturer and an average retailer, each company being based on empirical price data and average financial characteristics for its industry. Results for the period of stable prices show that, even for the average retailer, historical cost rates of return can differ from current-cost returns by material amounts (at least 10 percent higher) for more than a decade. The findings suggest a need to reconsider the increasingly popular belief that inflation is no longer high enough to bother with current cost disclosures.