How does the government reduce inflation

Inflation and deflation

When there is deflation, the prices of products and services fall. That also sounds good at first glance. What's the problem with deflation?

Problematic signals can emanate from falling prices. People postpone their purchases in the future, expecting to get more goods and services later for a certain amount of money. Companies are selling and investing less, possible consequences are site closings and rising unemployment. Consumers are becoming even more cautious, and purchasing reluctance continues to grow. The banks hardly grant any more loans, tax revenues and government spending are falling - this can set in motion a downward cycle in which economic output declines more and more.

Terms like runaway inflation suggest that speed matters. When does inflation become a problem?

The speed of the price change, measured using the so-called inflation rate, is very important. The higher the expected inflation alone, the greater the problems associated with it. Even a reliably low inflation target is therefore of great importance. The European Central Bank has set an annual inflation rate of below 2% as a target for price stability for the Eurosystem. Anything that would go well beyond this value in the long term would already be a problem.

What are monetary and economic control options to counter deflation or inflation?

Inflation and deflation are very closely related to monetary policy. This is the task of the central banks. Its main instruments are interest and the amount of money in circulation.

If the price level rises too high, the central bank counteracts a "restrictive" monetary policy: interest rates rise and the money supply is reduced. The devaluation of money and the loss of purchasing power slow down because the relative value of money increases. A reliable target for inflation, such as that used by B. aspiring to the European Central Bank, plays an important role in the success.

Fighting deflation is more difficult. Once the dubious downward cycle has started, it can take a long time to stop or reverse it. An "expansionary" monetary policy, that is, falling interest rates and a higher amount of money, is often no longer enough. The demand for goods and services then has to be supplemented by economic policy measures, e.g. B. through economic stimulus and support programs. This can be associated with high costs, especially for the state, with no guarantee of success for an end to deflation.

If you want to know more about the inflation year 1923 and the tricks people used to secure their survival during the time of hyperinflation, then Erich Maria Remarque's novel "The Black Obelisk" is recommended to you.