Economist Mark Thoma offers some thoughts on grade inflation:
There are two episodes that account for most grade inflation. The first is from the 1960s through the early 1970s. This is usually explained by the draft rules for the Vietnam War. The second episode begins around 1990 and is harder to explain….
My study finds an interesting correlation in the data. During the time grades were increasing, budgets were also tightening inducing a substitution towards younger and less permanent faculty. I broke down grade inflation by instructor rank and found it is much higher among assistant professors, adjuncts, TAs, instructors, etc. than for associate or full professors. These are instructors who are usually hired year-to-year or need to demonstrate teaching effectiveness for the job market, so they have an incentive to inflate evaluations as much as possible, and high grades are one means of manipulating student course evaluations.
Alex Tabarrock offers some additional thoughts & background links.