Abstract
An analysis of the relation between inflation and uncertainty at short and long horizons shows that an increase in the level of inflation has little effect on the variance of deviations but makes the trend considerably less stable. Thus, inflation has much larger effects on uncertainty at long horizons. Uncertainty about inflation over short horizons depends mainly on the variance of deviations, while uncertainty about inflation over long horizons depends mainly on the variance of the trend. The results suggest that high inflation makes policy less stable, since trend inflation is determined by monetary policy. This fits the US experience of the 1970s. The finding that high inflation raises long-run uncertainty implies that there are substantial costs associated with inflation. Gordon questions the feasibility of stabilizing nominal gross national product growth at a rate that ratifies the current rate of core inflation.