Tim Harford at the Financial Times finds le mot juste — not grade inflation, but grade distortion:
Grade distortion is a serious affair. Students and their teachers are forced to switch to grey market transactions denominated in alternative currencies: the letter of recommendation, for example. Like most alternative currencies, these are a hassle.
Grade distortions, like price distortions, destroy information and oblige people to look in strange places for some signal amid the noise. Students are judged not on their strongest subjects