how inflation can be controlled
a country s financial regulator shoulders the important responsibility of keeping inflation in check it is done by implementing measures through monetary policy which refers to the actions of a central bank or other committees that determine the size and rate of growth of the money supply in the u s the fed s monetary policy goals include moderate long term interest rates price stability and maximum employment each of these goals is intended to promote a stable financial environment the federal reserve clearly communicates long term inflation goals in order to keep a steady long term rate of inflation which is thought to be beneficial to the economy price stability or a relatively constant level of inflation allows businesses to plan for the future since they know what to expect the fed believes that this will promote maximum employment which is determined by non monetary factors that fluctuate over time and are therefore subject to change for this reason the fed doesn t set a specific goal for maximum employment and it is largely determined by employers assessments maximum employment does not mean zero unemployment as at any given time there is a certain level of volatility as people vacate and start new jobs hyperinflation is often described as a period of inflation of 50 or more per month monetary authorities also take exceptional measures in extreme conditions of the economy for instance following the 2008 financial crisis the u s fed kept the interest rates near zero and pursued a bond buying program called quantitative easing qe some critics of the program alleged it would cause a spike in inflation in the u s dollar but inflation peaked in 2007 and declined steadily over the next eight years there are many complex reasons why qe didn t lead to inflation or hyperinflation though the simplest explanation is that the recession itself was a very prominent deflationary environment and quantitative easing supported its effects consequently u s policymakers have attempted to keep inflation steady at around 2 per year the european central bank ecb has also pursued aggressive quantitative easing to counter deflation in the eurozone and some places have experienced negative interest rates that s due to fears that deflation could take hold in the eurozone and lead to economic stagnation moreover countries that experience higher rates of growth can absorb higher rates of inflation india s target is around 4 with an upper tolerance of 6 and a lower tolerance of 2 while brazil aims for 3 25 with an upper tolerance of 4 75 and a lower tolerance of 1 75 meaning of inflation deflation and disinflationwhile a high inflation rate means that prices are increasing a low inflation rate does not mean that prices are falling counterintuitively when the inflation rate falls prices are still increasing but at a slower rate than before when the inflation rate falls but remains positive this is known as disinflation conversely if the inflation rate becomes negative that means that prices are falling this is known as deflation which can have negative effects on an economy because buying power increases over time consumers have less incentive to spend money in the short term resulting in falling economic activity hedging against inflationstocks are considered to be the best hedge against inflation as the rise in stock prices is inclusive of the effects of inflation since additions to the money supply in virtually all modern economies occur as bank credit injections through the financial system much of the immediate effect on prices happens in financial assets that are priced in their home currency such as stocks special financial instruments exist that one can use to safeguard investments against inflation they include treasury inflation protected securities tips low risk treasury security that is indexed to inflation where the principal amount invested is increased by the percentage of inflation one can also opt for a tips mutual fund or tips based exchange traded fund etf to get access to stocks etfs and other funds that can help avoid the dangers of inflation you ll likely need a brokerage account choosing a stockbroker can be a tedious process due to the variety among them gold is also considered to be a hedge against inflation although this doesn t always appear to be the case looking backward examples of inflationsince all world currencies are fiat money the money supply could increase rapidly for political reasons resulting in rapid price level increases the most famous example is the hyperinflation that struck the german weimar republic in the early 1920s the nations that were victorious in world war i demanded reparations from germany which could not be paid in german paper currency as this was of suspect value due to government borrowing germany attempted to print paper notes buy foreign currency with them and use that to pay their debts this policy led to the rapid devaluation of the german mark along with the hyperinflation that accompanied the development german consumers responded to the cycle by trying to spend their money as fast as possible understanding that it would be worth less and less the longer they waited more money flooded the economy and its value plummeted to the point where people would paper their walls with practically worthless bills similar situations occurred in peru in 1990 and in zimbabwe between 2007 and 2008 