It took monetary authorities around the world a while to realize that rising inflation was not just the product of a series of temporary special factors. By the time most central banks reacted, inflation had become entrenched and proved very difficult to bring down. The persistent inflation of the 1970s and 1980s undermined economic performance worldwide. Canada did not escape unscathed. Because inflation creates uncertainty, it makes it much more difficult for households and businesses to judge future prices and to make sound economic decisions.
High inflation encourages speculation rather than productive investments.
It raises interest rates. And, in the end, it exacerbates both the booms and the busts. Restrictive monetary policies in the United States and in Canada during the early 1980s finally brought inflation down from its double-digit levels. But fears of inflation lingered, encouraging continued debt-financed speculation in real estate and other assets. By the late 1980s, inflation pressures were on the rise again.