On the variability of the inflation rate

The variability of the inflation rate is studied by means of phase plane analysis and a related Markov chain analysis. Empirical results are presented for four Latin American countries using the Markov chain analysis. The empirical results suggest that an inflation rate of 17-18 percent per year might reasonably be interpreted as a critical rate below which inflation decelerates and above which it accelerates. A policy implication is that an inflation rate above this critical level might warrant extreme measures, such as price controls, in order to shock the system back to an inflation rate below the critical level, at which point the system becomes self-correcting.