essay on how to control inflation

Methods to Control Inflation

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy (changing interest rates). However, in theory, there are a variety of tools to control inflation including:

• Monetary policy – Higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation.
• Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.
• Supply-side policies – policies to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs.
• Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary pressures.
• Wage/price controls – trying to control wages and prices could, in theory, help to reduce inflationary pressures. However, they are rarely used because they are not usually effective.

Monetary Policy

In a period of rapid economic growth, demand in the economy could be growing faster than its capacity to meet it. This leads to inflationary pressures as firms respond to shortages by putting up the price. We can term this demand-pull inflation .

In response to inflation, the Central bank could increase interest rates.

• Higher interest rates rates make borrowing more expensive and saving more attractive.
• Homeowners will have to pay increase mortgage payments, leading to less disposable income to spend.
• Therefore households will have less ability and incentive to spend
• Also firms will be detered from borrowing to fund investment, leading to lower business investment.
• Therefore, higher interest rates are quite effective in slowing down consumer spending and investment, leading to a lower rate of economic growth. And as economic growth slows down, so does inflation.

A higher interest rate should also lead to a higher exchange rate (higher interest rate attracts hot money flows) The appreciation in the exchange rate will also reduce inflationary pressure by:

• Making imports cheaper. (There will be lower price of imported goods, such as petrol and raw materials)
• Reducing demand for exports and therefore lower total demand in the economy.
• Because exports are less competitive, exporting firms will have an incentive to cut costs and improve competitiveness over time.

UK Inflation and interest rates

Interest rates were increased in 2022 to deal with the surge in inflation. However, the increase in interest rates is relatively low compared to the size of the inflation. This is because the Bank of England hope the inflation will prove temporary.

Inflation and interest rates post-war

Inflation target

As part of monetary policy, many countries have an inflation target (e.g. UK inflation target of 2%, +/-1). The argument is that if people believe the inflation target is credible, then it will help to lower inflation expectations. If inflation expectations are low, it becomes easier to control inflation.

Countries have also made Central Bank independent in setting monetary policy. The argument is that an independent Central Bank will be free from political pressures and avoid making mistakes like cutting interest rates before an election to curry favour with voters.

Fiscal Policy

To reduce inflation, the government can increase taxes (such as income tax and VAT) and cut spending. This improves the government’s budget situation and helps to reduce demand in the economy.

Both these policies reduce inflation by reducing the growth of aggregate demand. If economic growth is rapid, reducing the growth of AD can reduce inflationary pressures without causing a recession.

Also increasing taxes to reduce inflation is likely to be politically unpopular which is why fiscal policy is rarely used to reduce inflation.

Other Policies to Reduce Inflation

1. Reduce expectations

A key determinant of inflation over time is inflation expectations. If people expect inflation next year, firms will put up prices and workers will demand higher wages. This expectation tends to cause higher inflation. If the Central Bank and government can effectively reduce expectations by making credible threats to bring inflation under control, this will make their job easier.

2. Price controls

With inflation, we will see firms trying to increase prices as much as they can to maintain profitability and deal with rising costs. One way to try to avoid this ‘profit-push’ inflation is to introduce price controls . This is where the government sets limits on price increases.

For example, in 1971 President Nixon imposed a price freeze that he reintroduced in 1973 after winning the election. The price freezes were politically popular for a short time but basically failed. Firms restricted supply and when price freezes ended, suppressed inflation returned with a vengeance. However, it is worth noting that price controls during wartime were successful in reducing inflation. One study by Paul Evans found in WWII price controls were successful in keeping prices 30% lower than otherwise. (though this was with rationing and 7% lower output).

3. Wage Control

If inflation is caused by wage inflation (e.g. powerful unions bargaining for higher real wages), then limiting wage growth can help to moderate inflation. Lower wage growth will reduce the costs for firms and lead to less excess demand in the economy.

However, as the UK discovered in the 1970s, it can be difficult to control inflation through income policies, especially if the unions are powerful. Also, wage control requires widespread co-operation in the economy, but if firms are facing labour shortages they will be more concerned to get the workers, even if they have to exceed government wage controls.

4. Monetarism

Monetarism seeks to control inflation by controlling the money supply. Monetarists believe there is a strong link between the money supply and inflation. If you can control the growth of the money supply, then you should be able to bring inflation under control. Monetarists would stress policies such as:

• Higher interest rates (tightening monetary policy)
• Reducing budget deficit (deflationary fiscal policy)
• Control of money being created by the government

However, in practice, the link between money supply and inflation is less strong.

5. Supply-Side Policies

Often inflation is caused by persistent uncompetitiveness and rising costs. Supply-side policies may enable the economy to become more competitive and help to moderate inflationary pressures. For example, more flexible labour markets may help reduce inflationary pressure.

However, supply-side policies can take a long time, and cannot deal with inflation caused by rising demand.

6. Exchange rate policy

A country may seek to keep inflation low by joining a fixed exchange rate mechanism. The argument is that if the value of a currency is fixed (or semi-fixed) then this creates a discipline to keep inflation low. If inflation rises, the currency would become uncompetitive and start to fall. In the late 1980s, the UK joined the European Exchange Rate Mechanism (ERM) partly to bring inflation under control. However, targetting inflation through the exchange rate can is difficult and the UK was forced to leave the ERM in 1992 .

6. Ways to Reduce Hyperinflation – change currency

In a period of hyperinflation, conventional policies may be unsuitable. Expectations of future inflation may be hard to change.  When people have lost confidence in a currency, it may be necessary to introduce a new currency or use another like the dollar (e.g. Zimbabwe hyperinflation ).

Ways to reduce Cost-Push Inflation

Cost-push inflation (e.g. due to rising oil prices) can lead to inflation and lower growth. This is the worst of both worlds and is more difficult to control without leading to lower growth. In 2022 the world saw a rise in cost-push inflation due to rising energy prices and the end of Covid lockdown causing supply shortages.

Cost-push inflation is more difficult to reduce because it is fundamentally caused by supply problems. Raising interest rates is a blunt tool and likely to cause unacceptably lower growth. This is why Central Banks tend to tolerate a higher rate of cost-push inflation and hope it is short-lived. In the long-term we can try and tackle the supply issues, such as more flexible labour markets, stock-piling oil reserves to deal with crises and policies to increase competitiveness.

Further reading

• Policies to reduce cost-push inflation
• Monetary policy
• Policies to reduce unemployment
• Causes of Inflation

30 thoughts on “Methods to Control Inflation”

Great article,

I was just wondered why Mr. Tejvan did not mention (Exchange Rate) and it’s role of controlling inflation.

I just found out it was mentioned in the first picture which I couldn’t see in the beginning.

so good to now our country ‘s status of economy and i really thank m tejva pettinger i have question the law demand .how can the law of demand be violated

Please do not trust the big corp in controlling their own prices,because they are first one to manipulates of their own prices. So now the US government is proposing to help the American people,by giving us $ 1000 dollar/each but US corporations have already increased their prices.by 30-60% of the present prices So the american people are not really getting anyhelp at all because prices are already inflated. that it is not help at all. US governement should impose a US price freeze. Iam not an economist, Iam just a common JOe who is feeling the pinch

There may be two ways or Strategies dear Joe:-

One way government want to make people Happy by giving $1000 and other way they are also collecting money from Corp orates by increase raw material costs and Corporate Taxes.

Ultimately they are politicians …. How they will let people enjoying there money

Really informative article..

Helped me in exams. 😊😇👍✌

how can tax(fiscal policy tool) and interest rate (monetary policy tool) be used side bty side to control inflation ?

Incase of veblen goods- this are the goods which are consumed for show off Incase of giffen goods- this are the goods which are perceived to be inferior yet the consumers consumes more of it since they cannot afford the alternative superior goods Incase of drastice change in price Incase of an irrational consumer

although the fiscal policies are implemented to control the inflation, the central bank is still under political control and therefore the policies only remain applicable in theory. these institutions are never autonomous

I though this article was informative. In our current situation, before things get much worse there are a couple of other options the government might consider:

a) Go to rationing of goods and services (i.e. fuel, food etc.) like during WWII, or,

b) Institute a price freeze across the board (with teeth as it were). Especially when profits are up, as in the big oil companies are doing just fine (just saying).

I believe these methods have been done by Presidents before, the last two in my memory were FDR and Richard Nixon.

How to reduce inflation? 1.In the middle ages. Reducing supply of money. 2.Now. Innovation could improve the major disinflationary policy.

You could also decrease the money supply by increasing the reserve ratio for banks. This would reduce inflation.

U’r definition is well tank’s

Comments are closed.

What can the government do to stop or slow inflation?

The main driver of inflation is consumer spending, experts told ABC News.

Inflation in the U.S. rose 8.5% in March, compared with the prior 12 months, marking the highest increase since 1981, according to the Labor Department's Consumer Price Index .

Between February and March, inflation rose 1.2%, making for the biggest month-to-month jump since 2005 .

MORE: US long-term mortgage rates rise; 30-year loan reaches 5%

According to several economists and other financial experts, high consumer demand in the economy -- met with low supply -- is the main factor driving inflation. The war in Ukraine is also driving up prices, specifically on oil and food, they said.

And the government is limited on intervening, according to experts who spoke with ABC News.

Experts also told ABC News that inflation is likely to be an issue in the coming months, one even saying they expect it to last for years.

Factors driving inflation

Consumers traditionally spend the bulk of their money on services, but during the pandemic, demand shifted toward goods, Stacey Tisdale, financial journalist and founder of Mind Money Media told ABC News.

"You saw that breakdown, you saw manufacturers not be able to keep up with that demand, you saw the challenges that manufacturers were having, because of COVID, then you saw the supply chain disruptions. And that's kind of what's underpinning all of this," Tisdale said.

Strong consumer demand unmet with enough supply, makes for a main driver of inflation, experts said.

"The biggest factor driving up inflation has been extraordinarily strong demand, as consumers have more money in their bank accounts, lower interest rates to borrow at stronger stock prices and a lot of money they saved up because they didn't spend much in 2020," Jason Furman, a professor of practice at Harvard and a former top economic advisor to President Barack Obama who served as a chief economist and member of the cabinet, said.

"That's been exacerbated more recently by things like the higher oil prices due to [Russian President Vladimir] Putin's invasion of Ukraine," Furman added.

Some experts think stimulus money exacerbated the increased demand.

"We pumped a lot of demand into the economy, particularly the American Rescue Plan in early 2021, giving everybody $1,400," said David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy at Brookings.

"And with the benefit of hindsight, we probably put too much money in people's pockets -- they want to spend it, but the supply side of the economy is unable to accommodate the rapid increase in demand that comes both from the fiscal stimulus and from the fact that people are beginning to relax about the pandemic," Wessel said.

Furman said inflation in the U.S. is worse than in other developed nations, in part, because of stimulus funds from the government.

"The United States has more inflation than any other major advanced economy. Probably because we've had a larger fiscal response. No other countries sent out checks on the scale that we did," Furman said.

Other experts agree that stimulus payments contributed to inflation, but say the mass distributed payouts are not the cause. The government handed out three rounds of checks to Americans during the pandemic as financial relief, in hopes of boosting the economy.

"You could certainly make the case … that the stimulus package definitely contributed to the inflation rate, but you didn't have big stimulus packages in Europe. And they're still looking at 7.5% inflation," Dean Baker, a senior economist and co-founder of the Center for Economic and Policy Research, told ABC News.

MORE: IMF chief: Ukraine war and inflation threaten global economy

The Russian invasion of Ukraine is driving gas prices "through the roof" and creating concerns about crops coming out of Ukraine, which is a major global exporter of wheat, Baker said.

"There's real concerns that a lot of that isn't going to be planted or isn't able to be exported. And we've seen a big rise in the price of wheat, a number of other farm commodities in the last two months or so since the war," Baker said.

What the government can do

With increased consumer demand being the main driver of inflation, experts said there is not much the government can do to fight inflation, but they agree that the Federal Reserve should raise interest rates.

"The main thing is for the Fed to raise interest rates, and to start selling off assets. The goal of that is to make it more expensive to borrow money to buy a house or to buy a car, or for a business to buy plants and equipment. And that will cool off demand in the economy, slow economic growth and slow inflation," Furman said.

"How much it does any of those is incredibly uncertain," he added.

Baker agreed and said that "having a zero interest didn't make sense given the strength of the labor market."

To help bring down oil prices, Baker said if the government commits to supporting the oil market to some effect, it could encourage oil companies, who were burned by the 2014 collapse of oil prices, to drive up production faster.

"That's fresh enough in people's minds that they're reluctant to go headfirst into drilling. So one way to try to counter that is the Biden administration … could make a commitment that they'll support the market," Baker said.

Such a commitment could be that if oil prices fall below a certain amount, the government would buy barrels to restock the strategic reserve, and therefore support oil prices, Baker said.

Wessel suggested that the Biden administration could also repeal Trump-era tariffs , which could drive down the price of imports; raise taxes; or cut spending to drive demand out of the economy.

What is to come?

Inflation could remain an issue for the coming months, but experts disagree on how long it could last.

"I saw some signs in the [Consumer Price Index] that suggests that we may be past the worse, but I expect inflation to be high at least for another 18 to 24 months," Wessel said.

Furman said that inflation could last for years.

"Some of the inflation is probably transitory. I don't think the underlying true inflation rate in the economy is 8%. But it probably isn't 2%, either. And so inflation should start to come down a bit, but it's unlikely to come anywhere near where the Fed wants it to come," Furman said.

"It easily could remain high for years to come. We could get lucky and it could just all magically disappear. [Or] we could have a recession, which could make it disappear. I think the most likely scenario though, is that it persists for several years," Furman said.

"People should be planning for interest rates going higher, so things like mortgages and car loans getting more expensive. They should plan on prices staying high. They should, though, understand that it's still a very, very strong labor market. So there's a lot of job options out there," Furman said.

Editor's note: Story updated to correct spelling of Stacey Tisdale's name.

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Strategies for Controlling Inflation

This paper examines what strategies policymakers have used to both reduce and control inflation. It first outlines why a consensus has emerged that inflation needs to be controlled. Then it examines four basic strategies: exchange rate pegging, monetary targeting, inflation targeting, and the just do it' strategy of preemptive monetary policy with no explicit nominal anchor. The discussion highlights the advantages and disadvantages of each strategy and sheds light not only on how disinflation might best be achieved, but also on how hard won gains in lowering inflation can be locked in.

• Acknowledgements and Disclosures

MARC RIS BibTeΧ

Download Citation Data

Published Versions

Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.

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In addition to working papers , the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter , the NBER Digest , the Bulletin on Retirement and Disability , the Bulletin on Health , and the Bulletin on Entrepreneurship  — as well as online conference reports , video lectures , and interviews .

Committee for a Responsible Federal Budget

Six ways to fight inflation.

Personal Consumption Expenditure (PCE) inflation rose by 6.3 percent over the past year and 0.6 percent last month according to new data from the Bureau of Economic Analysis, well above the Federal Reserve’s 2 percent annual (0.166 percent monthly) target. Consumer Price Index (CPI) inflation is up 8.6 percent – the highest in over four decades.

While it is mainly the responsibility of the Federal Reserve to fight inflation, smart fiscal policy can help assist the Fed in reducing the inflation rate while minimizing negative effects on output, employment, and financial stability.

As President Biden has remarked numerous times , “bringing down the deficit is one way to ease inflationary pressures.” This could include avoiding further deficit-boosting measures; lowering health care costs; raising tax revenue; reducing consumption-oriented spending; promoting work, savings, and investment; and/or lowering energy, trade, and procurement costs.

As the Federal Reserve continues to raise interest rates and shrink its balance sheet in order to temper demand and reduce inflationary pressures, Congress and the President should use tools at their disposal to assist in the effort to fight inflation. They could reduce inflation in the following ways:

• Stop Digging: At a minimum, Congress should avoid making the inflationary environment worse. They could do so by ending remaining COVID relief – including the student debt repayment pause and enhanced Medicaid payments to states – that are boosting price levels by 0.2 to 0.7 percentage points. They should also avoid adding more to the deficit, whether through a gas tax holiday , student debt cancellation , expanded veterans benefits , a “competitiveness" bill , aid to restaurants , retirement reforms , or new tax cuts.
• Lower Health Care Costs: The federal government directly influences many health care prices through payments to Medicare providers and Medicare Advantage plans as well as through its coverage of prescription drugs. Thoughtful health care reforms can reduce prices and the utilization of care, which would ease inflationary pressures. Based on one study , each percentage point reduction in Medicare costs would reduce the inflation rate by 5 to 15 basis points.
• Reform the Tax Code to Raise More Revenue: The size and structure of the tax code affect inflation mainly through their impacts on the size and distribution of after-tax income. Tax increases can reduce demand in a distributionally desirable way, putting downward pressure on inflation. Lawmakers can further reduce inflation by limiting tax expenditures and subsidies that drive up specific prices in the economy.
• Limit Discretionary Spending, Reduce Consumption-Oriented Spending, and Shrink Aid to States: To further temper demand, policymakers should limit the size of next year’s appropriations , reimpose discretionary spending caps to limit future spending growth, and reduce spending on various programs ranging from farm subsidies to Social Security benefits for high earners. In light of the $900 billion of federal aid sent to cash-flush state and local governments, lawmakers could also consider reducing certain state and local funding.
• Promote Work, Savings, and Investment: Increased labor supply, capital supply, productivity, and personal savings can help to reduce inflationary pressures. Policymakers could reduce barriers to work, for example, by eliminating the Social Security earnings test , allowing older workers to collect the Earned Income Tax Credit, improving work requirements in some programs, providing vocational training for disabled workers , and other reforms. They could encourage savings by promoting the purchase of inflation-indexed bonds, expanding the saver's credit, or improving tax preferences for retirement savings. They could also support investments through regulatory reforms and targeted federal funding. Importantly, failing to offset new investments will undermine any inflationary gains, as higher demand would offset higher supply.
• Lower Energy, Trade, and Procurement Costs: Beyond the normal supply and demand channels, government policies and regulations can influence the before- or after-tax price of various goods and services. For example, the government can help control inflation by ensuring it is getting the best price for its dollars, reducing tariffs that push up the price of goods, ending regulations that boost shipping costs, and  encouraging extraction of fossil fuels and production of renewable energy , among other means.

The Federal Reserve is rightly responsible for maintaining price stability and should continue to take steps to bring inflation down. However, navigating a “soft landing” – in which inflation is brought under control without triggering a recession – on its own will be challenging for the Fed, particularly if lawmakers continue to use fiscal policy to worsen inflationary pressures .

Congress and the President should instead work together to assist the Federal Reserve in fighting inflation, including by paying for new policies, ending COVID relief, lowering health care costs, raising revenue, reducing spending, boosting the supply side of the economy, and lowering prices within their purview.

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What Makes It Hard to Control Inflation

Monetary policy lives in the shadow of us federal debt..

• By John H. Cochrane
• November 03, 2021
• CBR - Monetary Policy
• Share This Page

Today’s inflation is transitory, our central bankers assure us. It will go away on its own. But what if it does not? Central banks will have “the tools” to deal with inflation, they tell us. But just what are those tools? Do central banks have the will to use them, and will governments allow them to do so?

Should inflation continue to surge, central banks’ main tool is to raise interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s in the United States, United Kingdom, and much of Europe. How much pain, and how deep of a dip, does it take to stop inflation and to keep inflation in check? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one-and-a-half times as much as inflation. So if inflation rises from 2 percent to 5 percent, interest rates should rise by 4.5 percentage points. Add a baseline of 2 percent for the inflation target and 1 percent for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5 percent. If inflation accelerates further before central banks act, reining it in could require the 15 percent interest rates of the early 1980s.

Would central banks do that? If they did, would high interest rates control inflation in today’s economy? There are many reasons for worry.

The shadow of debt

Monetary policy lives in the shadow of debt. US federal debt held by the public was about 25 percent of GDP in 1980, when Federal Reserve chair Paul Volcker started raising rates to tame inflation. Now, it is 100 percent of GDP and rising quickly, with no end in sight. When the Fed raises interest rates 1 percentage point, it raises the interest costs on debt by 1 percentage point, and, at 100 percent debt to GDP, 1 percent of GDP is about $227 billion. A 7.5 percent interest rate therefore creates interest costs of 7.5 percent of GDP, or $1.7 trillion.

Where will those trillions of dollars come from? Congress could drastically cut spending or find ways to increase tax revenues. Alternatively, the US Treasury could try to borrow additional trillions. But for that option to work, bond buyers must be convinced that a future Congress will cut spending or raise tax revenues by the same trillions of dollars, plus interest. Even if investors seem confident at the moment, we cannot assume that they will remain so indefinitely, especially if additional borrowing serves only to pay higher interest on existing debt. Even for the United States, there is a point at which bond investors see the end coming and demand even higher interest rates as a risk premium, thereby raising debt costs even more, in a spiral that leads to a debt crisis or to a sharp and uncontrollable surge of inflation. If the US government could borrow arbitrary amounts and never worry about repayment, it could send its citizens checks forever and nobody would have to work or pay taxes again. Alas, we do not live in that fanciful world.

In sum, for higher interest rates to reduce inflation, they must be accompanied by credible and persistent fiscal tightening, now or later. If the fiscal tightening does not come, higher interest rates will eventually fail to contain inflation.

This is a perfectly standard proposition, though it is often overlooked when discussing the US and Europe. It is embodied in the models used by the US Fed and other central banks. It was standard International Monetary Fund advice for decades.

Successful inflation and currency stabilization almost always includes monetary and fiscal reform, and usually microeconomic reform. The role of fiscal and microeconomic reform is to generate sustainably higher tax revenues by boosting economic growth and broadening the tax base, rather than with sharply higher and growth-reducing marginal tax rates. Many attempts at monetary stabilization have fallen apart because the fiscal or microeconomic reforms failed. Latin American economic history is full of such episodes.

The government can borrow as long as people believe that the fiscal reckoning will come in the future. But when people lose that faith, things can unravel quickly and unpredictably.

Even the US experience in the 1980s conforms to this pattern. The high interest rates of the early ’80s raised interest costs on the US national debt, contributing to most of the “Reagan deficits,” which seemed large at the time. Even after inflation declined, interest rates remained high, arguably because markets were worried that inflation would come surging back.

So why did the US inflation-stabilization effort succeed in the 1980s, after failing twice before in the ’70s, and countless times in other countries? In addition to the Fed remaining steadfast and the Reagan administration supporting it through two bruising recessions, the US undertook a series of important tax- and microeconomic-policy changes, most notably the 1982 and 1986 tax reforms, which sharply lowered marginal rates, as well as market-oriented regulatory reforms starting with the Carter-era deregulation of trucking, air transport, and finance.

The US experienced a two-decade economic boom. A larger GDP boosted tax revenues, enabling debt repayment despite high real-interest rates. By the late 1990s, strange as it sounds now, economists were actually worrying about how financial markets would work once all US Treasury debt had been paid off. The boom was arguably a result of these monetary, fiscal, and microeconomic reforms, though we do not need to argue the cause and effect of this history. Even if the economic boom that produced fiscal surpluses was coincidental with tax and regulatory reform, the fact remains that the US government successfully paid off its debt, including debt incurred from the high interest costs of the early 1980s. Had it not done so, inflation would have returned.

The borrower ducks

But would that kind of successful stabilization happen now, with the US national debt four times larger and still rising, and with interest costs for a given level of interest rates four times larger than the contentious Reagan deficits? Would Congress really abandon its ambitious spending plans, or raise tax revenues by trillions, all to pay a windfall of interest payments to largely wealthy and foreign bondholders?

Arguably, it would not. If interest costs on the debt were to spiral upward, Congress would likely demand a reversal of the high interest-rate policy. The last time the US debt-to-GDP ratio was 100 percent, at the end of World War II, the Fed was explicitly instructed to hold down interest costs on US debt, until inflation erupted in the 1950s.

The unraveling can be slow or fast. It takes time for higher interest rates to raise interest costs, as debt is rolled over. The government can borrow as long as people believe that the fiscal reckoning will come in the future. But when people lose that faith, things can unravel quickly and unpredictably.

Will and politics

Fiscal-policy constraints are only the beginning of the Fed’s difficulties. Will the Fed act promptly, before inflation gets out of control? Or will it continue to treat every increase of inflation as “transitory,” to be blamed on whichever price is going up most that month, as it did in the early 1970s?

It is never easy for the Fed to cause a recession, and to stick with its policy through the pain. Nor is it easy for an administration to support the central bank through that kind of long fight. But tolerating a lasting rise in unemployment—concentrated as usual among the disadvantaged—seems especially difficult in today’s political climate, with the Fed loudly pursuing solutions to inequality and inequity in its interpretation of its mandate to pursue “maximum employment.”

Moreover, the ensuing recession would likely be more severe. Inflation can be stabilized with little recession if people really believe the policy will be seen through. But if they think it is a fleeting attempt that may be reversed, the associated downturn will be worse.

One might think this debate can be postponed until we see if inflation really is transitory or not. But the issue matters now. Fighting inflation is much easier if inflation expectations do not rise. Our central banks insist that inflation expectations are “anchored.” But by what mechanism? Well, by the faith that those same central banks would, if necessary, reapply the harsh Volcker medicine of the 1980s to contain inflation. How long will that faith last? When does the anchor become a sail?

Two percentage points is the insurance premium for eliminating the chance of a debt crisis for 30 years, and for making sure the Fed can fight inflation if it needs to do so. I am not alone in thinking that this seems like inexpensive insurance.

A military or foreign-policy analogy is helpful. Fighting inflation is like deterring an enemy. If you just say you have “the tools,” that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.

Yet the Fed has been remarkably silent on just what the “tools” are, and just how ready it is to deploy them, no matter how painful doing so may be. There has been no parading of matériel. The Fed continues to follow the opposite strategy: a determined effort to stimulate the economy and to raise inflation and inflation expectations by promising no-matter-what stimulus. The Fed is still trying to deter deflation and says it will let inflation run above target for a while in an attempt to reduce unemployment, as it did in the 1970s.

It has also precommitted not to raise interest rates for a fixed period of time, rather than for as long as requisite economic conditions remain, which has the same counterproductive result as announcing military withdrawals on specific dates. Like much of the US government, the Fed is consumed with race, inequality, and climate change, and thus is distracted from deterring its traditional enemies.

Buy some insurance! 

An amazing opportunity to avoid this conundrum beckons, but it won’t beckon forever. The US government is like a homeowner who steps outside, smells smoke, and is greeted by a salesman offering fire insurance. So far, the government has declined the offer because it doesn’t want to pay the premium. There is still time to reconsider that choice.

Higher interest rates raise interest costs only because the US has financed its debts largely by rolling over short-term debt, rather than by issuing long-term bonds. The Fed has compounded this problem by buying up large quantities of long-term debt and issuing overnight debt—reserves—in return.

The US government is like any homeowner in this regard. It can choose the adjustable-rate mortgage, which offers a low initial rate but will lead to sharply higher payments if interest rates rise. Or it can choose the 30-year (or longer) fixed-rate mortgage, which requires a larger initial rate but offers 30 years of protection against interest-rate increases.

Recommended Reading

Who is right about inflation.

The US Fed and consumers have very different expectations about the future.

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Is US Inflation More Than a Temporary Phenomenon?

Economists gauge the likelihood of the US economy “overheating.”

Right now, the one-year Treasury rate is 0.07 percent, the 10-year rate is 1.3 percent, and the 30-year rate is 1.9 percent. Each one-year bond saves the US government about 2 percentage points of interest cost as long as rates stay where they are. But 2 percent is still negative in real terms. Two percentage points is the insurance premium for eliminating the chance of a debt crisis for 30 years, and for making sure the Fed can fight inflation if it needs to do so. I am not alone in thinking that this seems like inexpensive insurance. Even former US secretary of the treasury Lawrence H. Summers has changed his previous view to argue that the US should move swiftly to long-term debt.

But it’s a limited-time opportunity. Countries that start to encounter debt problems generally face higher long-term interest rates, which forces them to borrow in the short run and expose themselves to the attendant dangers. When the house down the street is on fire, the insurance salesman disappears, or charges an exorbitant rate.

Bottom line

Will the current inflation surge turn out to be transitory, or will it continue? The answer depends on our central banks and our governments. If people believe that fiscal and monetary authorities are ready to do what it takes to contain breakout inflation, inflation will remain subdued.

Doing what it takes means joint monetary and fiscal stabilization, with growth-oriented microeconomic reforms. It means sticking to those policies through the inevitable political and economic pain. And it means postponing or abandoning grand plans that depend on the exact opposite policies.

If people and markets lose faith that governments will respond to inflation with such policies in the future, inflation will erupt now. And in the shadow of debt and slow economic growth, central banks cannot control inflation on their own.

John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and was previously a professor of finance at Chicago Booth. This essay first appeared on Project Syndicate and his blog, The Grumpy Economist . 

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Facing down a surprising U.S. inflation surge

Kennedy School experts in public finance and economic policy weigh in on the causes and responses to the highest American consumer price jump in three decades.

Inflation in the United States has jumped to the highest level in 30 years, reaching 6.2% in October as measured by the Consumer Price Index. The COVID-19 pandemic has fueled consumer demand for goods and services at a time when supply lines are constrained and many industries have been affected by staff shortages. The inflation surge has generated intense political debate on the causes and the appropriate response.

We asked several economists and public finance experts at Harvard Kennedy School—all of whom have held senior federal government economics roles—to offer brief perspectives on how they view the underlying issues and the key policy choices facing the Biden administration and Congress. 

• Linda Bilmes - Inflation's impact at the state and local level
• Karen Dynan - Weighing the uncertainties
• Jeffrey Frankel - Inflation Do's and Don'ts
• Jason Furman - Supply and demand challenges
• Lawrence H. Summers - Biden team needs to signal its concern about inflation

Inflation risks also lie ahead for state and local governments

On the revenue side, income and sales tax receipts will largely keep pace with inflation, so moderate inflation is unlikely to have a major impact. However, if inflation leads to sharply higher interest rates that lead to a stock market sell-off, then states that are highly dependent on capital gains taxes (such as California and New Jersey) may suffer. Another area of vulnerability could be property taxes, especially states where increases in assessed values or in property taxes are capped, as with California’s Prop. 13. These prevent rising house prices feeding through into state revenues, and are also the major revenue source for local governments.

On the expense side, the biggest risk is rising wages, which consume the largest share of state budgets. We could see public sector unions pushing for a return of “CPI-plus” language in new labor agreements. This would automatically bake in the cost of higher inflation to local expenditures. In addition, high inflation could significantly weaken state pension plans, many of which assume that future wage increases will be only 2%.  Most of the current generation of local pension managers have little experience with inflation. They need to begin adjusting their portfolios now to prevent erosion of their asset bases.

Linda Bilmes is the Daniel Patrick Moynihan Lecturer in Public Policy and previously served as Assistant Secretary of Commerce.

What's certain is just how many uncertainties lie ahead

What is not clear is how quickly these issues will resolve. The size and persistence of demand/supply imbalances has repeatedly surprised us, in part because virus caseloads have stayed unexpectedly high. We have only a limited understanding of why so many would-be workers are staying out of the labor force, making it hard to predict how many will return and how quickly. We are not sure how much inflation expectations have risen (a critical determinant of whether higher inflation sticks) because of measurement difficulties.

This uncertainty makes it difficult for monetary policymakers to know when they need to begin raising rates to avoid letting inflation stay at undesirably high levels. Given that they may need to revise their views quickly based on incoming data, it is especially important that they communicate the high degree of uncertainty. Surprising financial markets with an abrupt unexpected change in policy could lead to a rapid decline in asset prices that causes a significant setback in the economic recovery.

Karen Dynan is a professor of the practice of economics and former chief economist of the U.S. Treasury.

Some inflation-fighting do's and don'ts

Let’s start with two don'ts.

• Don’t do what Federal Reserve Chair Arthur Burns and President Richard Nixon did in 1971, in order to help the president’s reelection: They responded to moderate 5% to 6 % inflation with a combination of rapid monetary stimulus and doomed wage-price controls. The lid was blown off the boiling pot a few years later; the inflation rate jumped above 12%.
• Don’t do what Donald Trump did on April 2, 2020 , to help out American oil producers: He persuaded Saudi Arabia that OPEC must cut oil output and raise prices.
• Continue to fight in the Senate for a fully funded social spending bill (“Build Back Better”).
• Let imports into the country more easily.  They are a safety valve for an overheated economy.  Trump put up a lot of import tariffs , which raise prices to consumers—sometimes directly, as with washing machines, and sometimes indirectly, as with steel and aluminum, which are important inputs into autos and countless other goods. With or without foreign reciprocation, U.S. trade liberalization could bring prices down quickly in many supply-constrained sectors. 
• Similarly, facilitating orderly immigration would help alleviate the shortage of workers that employers in some sectors are experiencing.
• Further vaccination would increase the supply of labor, through several possible channels.  One channel would be to keep children in school, allowing more parents to go back to work. Another channel is to alleviate worker’s fears of infection in the workplace. 

Jeffrey Frankel is the James W. Harpel Professor of Capital Formation and Growth and was a member of the Council of Economic Advisors from 1983-1984 and 1996-1999.   

Supply and demand—and the Federal Reserve’s key role

Economists like to explain everything with demand and supply, and the concepts work well here. Demand is likely to remain high, fueled by households with healthy balance sheets, continued fiscal support, and very low interest rates. No one knows how long it will take supply to recover, or even whether it will fully recover, but it could be at least a year. The combination of strong demand and weak supply will likely keep inflation uncomfortably high.

President Biden can do a little about inflation by helping with port capacity and other supply-chain measures. Even better would be dropping President Trump’s tariffs on China. But these steps would only be small. The main agency charged with controlling inflation is the Federal Reserve. They are right to continue to be focused on the millions of people without jobs but should recalibrate towards incorporating more concern for inflation into their policy stance, including setting a default of more rate increases in 2022, something it can call off if inflation and/or employment is well below what we are currently expecting.

Jason Furman is the Aetna Professor of the Practice of Economic Policy and previously was chair of the Council of Economic Advisors under President Obama.

Biden team needs to signal its determination to address inflation

 Simultaneously, the Administration should signal that a concern about inflation will inform its policies generally. Measures already taken to reduce port bottlenecks may have limited effect but are a clear positive step. Buying inexpensively should take priority over buying American. Tariff reduction is the most important supply-side policy the administration could undertake to combat inflation. Raising fossil fuel supplies, such as the recent deployment of the Strategic Petroleum Reserve, is crucial. And financial regulators need to step up and be attentive to the pockets of speculative excess that are increasingly evident in financial markets.

 Excessive inflation and a sense that it was not being controlled helped elect Richard Nixon and Ronald Reagan, and risks bringing Donald Trump back to power. While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed.

Lawrence H. Summers is Charles W. Eliot University Professor , Weil Director of the Mossavar-Rahmani Center for Business and Government,  and president emeritus of Harvard University. His government positions included Secretary of the Treasury in the Clinton Administration and Director of the National Economic Council under President Obama. Portions of this essay were excerpted from a Washington Post column .

Banner image by AP Photo/Noah Berger; inline image by Xinhua via Getty Images; faculty portraits by Martha Stewart

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How to mitigate the effects of inflation

January 16, 2022 Inflation hit a 40-year high last month, leaping 7 percent from the year prior. As households grapple with greater price hikes for groceries and other essentials, companies are contending with booming consumer demand and persistent supply-chain backlogs, keeping prices elevated. But how can companies determine that short-term price increases are fair? And how should they prepare to deal with the long-term consequences of inflationary markets? Explore these recent insights to get up to speed, and dive deeper on key topics, including:

• how companies can rebuild their price-negotiation capabilities and their long-term resilience
• three imperatives for CEOs aiming to step up amid a complex, uncertain, and rapidly evolving environment
• six proven strategies to release cash from the balance sheet
• why executives view mounting fallout on the supply chain and inflation as the biggest threats to growth in their countries’ economies

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How the Federal Reserve Measures Inflation

How changes in interest rates affect inflation, problems with using interest rates to control inflation, interest rates as a monetary policy tool, are the inflation rate and interest rate linked, what are the current inflation and interest rates, which is worse, inflation or deflation, the bottom line, what is the relationship between inflation and interest rates.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

• Inflation: What It Is, How It Can Be Controlled, and Extreme Examples
• 9 Common Effects of Inflation
• How to Profit From Inflation
• When Is Inflation Good for the Economy?
• How Does Current Cost of Living Compare to 20 Years Ago?
• Why Are P/E Ratios Higher When Inflation Is Low?
• What Causes Inflation and Who Profits From It?
• Understand the Different Types of Inflation
• Wage Push Inflation
• Cost-Push Inflation
• Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?
• Inflation vs. Stagflation: What's the difference?
• What is the Relationship Between Inflation and Interest Rates? CURRENT ARTICLE
• Inflation's Impact on Stock Returns
• How Does Inflation Affect Fixed-Income Investments?
• How Inflation Affects Your Cost of Living
• How Inflation Impacts Your Savings
• How Inflation Eats Away at Your Retirement Income
• What Impact Does Inflation Have on the Dollar Value Today?
• Inflation and Economic Recovery
• Hyperinflation
• Why Didn't Quantitative Easing Lead to Hyperinflation?
• Worst Cases of Hyperinflation in History
• How the Great Inflation of the 1970s Happened
• Stagflation
• Purchasing Power
• Consumer Price Index (CPI)
• Why Is the Consumer Price Index Controversial?
• Core Inflation
• Headline Inflation
• GDP Price Deflator
• Inflation Accounting
• Inflation-Adjusted Return
• Inflation Targeting
• Real Economic Growth Rate
• Real Gross Domestic Product (GDP)
• Real Income
• Real Interest Rate
• Real Rate of Return
• Wage-Price Spiral

Inflation and interest rates tend to move in the same direction, because interest rates are the primary tool used by the U.S. central bank to manage inflation.

The Federal Reserve Act directs the Fed to promote maximum employment and stable prices. Since 2012 the Federal Reserve has targeted an annual inflation rate of 2% as consistent with the stable prices portion of its dual mandate.

The Fed targets a positive rate of inflation, defined as a sustained rise in the overall price level for goods and services, because a sustained decline in prices, known as “deflation,” can be even more harmful to the economy. The positive levels of inflation and interest rates also provide the central bank with the flexibility to lower rates in response to an economic slowdown.

In August 2020 the Federal Reserve adopted average inflation targeting . This framework committed Fed policymakers to hold inflation above 2% for a time to compensate for stretches when the inflation rate fell short of that target.

Key Takeaways

• Interest rates tend to move in the same direction as inflation but with lags, because interest rates are the primary tool used by central banks to manage inflation.
• In the U.S. the Federal Reserve targets an average inflation rate of 2% over time by setting a range of its benchmark federal funds rate, the interbank rate on overnight deposits.
• Higher interest rates are generally a policy response to rising inflation.
• Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.

The Federal Reserve’s preferred inflation measure is the Personal Consumption Expenditures (PCE) Price Index. Unlike the Consumer Price Index (CPI) , which is based on a survey of consumer purchases, the PCE Price Index tracks consumer spending and prices through the business receipts used to calculate the gross domestic product (GDP) .

One of the figures provided by the PCE Price Index is known as the core PCE Price Index. This excludes food and energy prices that are typically more volatile and tend to be less reflective of the overall price trend as a result.

When the Federal Reserve responds to elevated inflation risks by raising its benchmark federal funds rate , it effectively increases the level of risk-free reserves in the financial system, limiting the money supply available for purchases of riskier assets. Conversely, when a central bank reduces its target interest rate, it effectively increases the money supply available to purchase risk assets.

By increasing borrowing costs, rising interest rates discourage consumer and business spending , especially on commonly financed big-ticket items such as housing and capital equipment. Rising interest rates also tend to weigh on asset prices, reversing the wealth effect for individuals and making banks more cautious in lending decisions.

Finally, rising interest rates signal the likelihood that the central bank will continue to tighten monetary policy , further tamping down inflation expectations.

As the chart above shows, policymakers often respond to changes in economic outlook with a lag, and their policy changes, in turn, take time to affect inflation trends.

Because of these lags, policymakers have to try to anticipate future inflation trends when deciding on rate levels in the present. Yet the Fed’s adherence to its inflation target can only be gauged with backward-looking inflation statistics. These can range widely amid economic shocks that can sometimes prove transitory and other times less so.

5% to 5.25%

The target federal funds rate announced by the Federal Reserve on May 3, 2023.

"In short, if making monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with a delay to the accelerator or the brake," former Federal Reserve chair Ben Bernanke said in 2004 while still a Fed governor.

Central banks trying to anticipate inflation trends risk making a policy error by needlessly stoking inflation with rates that are too low or stifling growth by raising them. In the case of the Federal Reserve, it must pursue its stable prices objective while also trying to maximize employment.

The Federal Reserve uses the federal funds rate as its primary monetary policy tool. The federal funds rate, targeted as a range since 2008, is the overnight rate at which banks lend to each other over the very short term.

Traditionally, the Federal Reserve used open market operations—purchases and sales of securities—to adjust the supply of banking system reserves and hold the federal funds rate on target. Demand for reserves was the result of banking reserve requirements imposed to ensure the soundness of banks.

In the years following the 2008 global financial crisis, the focus of bank regulation shifted to capital buffer requirements and stress tests to ensure long-term solvency. In 2019 the Fed unveiled a policy of targeting the federal funds rate with two other rates it sets outright.

The interest on reserve balances (IORB) rate is what the Fed pays banks for overnight deposits in their Fed accounts. It sets an effective floor under the federal funds rate. Overnight reverse purchase agreements are a supplementary tool that pays a somewhat lower interest rate to non-bank money market participants for overnight deposits.

In 2020 the Federal Reserve eliminated reserve requirements for banks and other depository institutions. That policy is still in force as of 2024.

Yes. The Federal Reserve attempts to control inflation by raising interest rates. Therefore, if the former rises, so does the latter in response.

The inflation rate at the end of January 2024 was 3.1%. The interest rate as of May 3, 2023, was in the range of 5% to 5.25%.

Deflation is worse than inflation, because it can cause a downward economic spiral that leads first to a recession and then possibly to a depression.

Interest rates and inflation tend to move in the same direction but with lags, because policymakers require data to estimate future inflation trends, and the interest rates they set take time to fully affect the economy. Higher rates may be needed to bring rising inflation under control, while slowing economic growth often lowers the inflation rate and may prompt rate cuts. The Fed targets a range of the federal funds rate, in part, by setting the rate it pays on banking reserve balances.

Federal Reserve Bank of Cleveland. " Why Does the Fed Care about Inflation? "

Federal Reserve Board. " Federal Reserve Issues FOMC Statement, 2022 ."

Federal Reserve Board. " Monetary Policy: What Are Its Goals? How Does It Work? "

Federal Reserve Bank of St. Louis. " Inflation, Disinflation and Deflation: What Do They All Mean? "

Federal Reserve Bank of St. Louis. " The Fed’s Inflation Target: Why 2 Percent? "

Federal Reserve Board. " 2020 Statement on Longer-Run Goals and Monetary Policy Strategy ."

Federal Reserve Bank of Cleveland. " PCE and CPI Inflation: What’s the Difference? "

U.S. Department of Commerce Bureau of Economic Analysis. " Personal Consumption Expenditures Price Index, Excluding Food and Energy ."

International Monetary Fund. " Monetary Policy: Stabilizing Prices and Output ."

Federal Reserve Board. " Federal Reserve Issues FOMC Statement, 2023 ."

Federal Reserve Board. " Remarks by Governor Ben S. Bernanke ."

Federal Reserve Board. " Policy Tools: Open Market Operations ."

Federal Reserve Bank of Chicago. " The Federal Funds Rate ."

Federal Reserve Board. " Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization ."

Federal Reserve Board. " Liberty Street Economics: The Federal Reserve’s Two Key Rates: Similar but Not the Same? "

Federal Reserve Board. " Federal Reserve Actions to Support the Flow of Credit to Households and Businesses ."

National Archives, Federal Register. " Reserve Requirements of Depository Institutions ."

U.S. Bureau of Labor Statistics. " Consumer Price Index ."

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Essay on Inflation: Types, Causes and Effects

Essay on Inflation!

Essay on the Meaning of Inflation:

Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously.

Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’ .

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’ . In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.

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It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level.

It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 – 193.6/193.6 × 100 = 15.6%.

As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

Essay on the Types of Inflation :

As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the contemporary society:

(a) According to Causes:

i. Currency Inflation:

This type of inflation is caused by the printing of currency notes.

ii. Credit Inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

iii. Deficit-Induced Inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called deficit-induced inflation.

iv. Demand-Pull Inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply.

If the supply of money in an economy exceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods” .

Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing too few goods.”

v. Cost-Push Inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production.

Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.

(b) According to Speed or Intensity:

i. Creeping or Mild Inflation:

If the speed of upward thrust in prices is very low then we have creeping inflation. What speed of annual price rise is a creeping one has not been stated by the economists? To some, a creeping or mild inflation is one when annual price rise varies between 2 p.c. and 3 p.c.

If a rate of price rise is kept at this level, it is considered to be helpful for economic development. Others argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of no danger.

ii. Walking Inflation:

If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a situation of walking inflation. When mild inflation is allowed to fan out, walking inflation appears. These two types of inflation may be described as ‘moderate inflation’.

Often, one-digit inflation rate is called ‘moderate inflation’ which is not only predictable, but also keep people’s faith on the monetary system of the country’. People’s confidence get lost once moderately maintained rate of inflation goes out of control and the economy is then caught with the galloping inflation.

iii. Galloping and Hyperinflation:

Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shattered. “Inflation in the double or triple digit range of 20, 100 or 200 per cent a year is labelled galloping inflation”.

iv. Government’s Reaction to Infla­tion:

Inflationary situation may be open or suppressed. Because of ant-inflationary policies pursued by the government, inflation may not be an embarrassing one. For instance, an increase in income leads to an increase in consumption spending which pulls the price level up.

If the consumption spending is countered by the government via price control and rationing device, the inflationary situation may be called a suppressed one. Once the government curbs are lifted, the suppressed inflation becomes open inflation. Open inflation may then result in hyperinflation.

Essay on the Causes of Inflation :

Inflation is mainly caused by excess demand/or decline in aggregate supply or output. Former leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply curve to shift leftward. Former is called demand-pull inflation (DPI) and the latter is called cost- push inflation (CPI).

Before describing the factors that lead to a rise in aggregate demand and a decline in aggregate supply, we like to explain “demand-pull” and “cost- push” theories of inflation.

Demand-Pull Inflation Theory :

There are two theoretical approaches to DPI —one is the classical and the other is the Keynesian.

According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve.

Given a situation of full employment, classicists maintained that a change in money supply brings about an equi-proportionate change in price level. That is why monetrarists argue that inflation is always and everywhere a monetary phenomenon.

Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand. According to Keynesians, aggregate demand may rise due to a rise in consumer demand or investment demand or government expenditure or net exports or the combination of these four.

Given full employment, such increase in aggregate demand leads to an upward pressure in prices. Such a situation is called DPI. This can be explained graphically.

Just like the price of a commodity, the level of prices is determined by the interaction of aggregate demand and aggregate supply. In Fig. 11.3, aggregate demand curve is negative sloping while aggregate supply curve before the full employment stage is positive sloping and becomes vertical after the full employment stage. AD 1 is the initial aggregate demand curve that intersects the aggregate supply curve AS at point E 1 .

The price level thus determined is OP 1 . As aggregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

Causes of Demand-Pull Inflation :

DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.

There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries.

Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

Cost-Push Inflation Theory :

In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.

Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.

This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig. 11.4) where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection point (E 1 ) of AD 1 and AS 1 curves determines the price level.

Now, there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 .

With the reduction in output, employment in the economy declines or unemployment rises. Further shift in the AS curve to AS 2 results in higher price level (OP 3 ) and a lower volume of aggregate output (OY 3 ). Thus, CPI may arise even below the full employment (Y f ) stage.

Causes of CPI :

It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline.

In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.

Essay on the Effects of Inflation :

People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” Since inflation reduces purchasing power it is bad.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.

When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad headings:

(i) Effect on distribution of income and wealth

(ii) Effect on economic growth.

(a) Effects of Inflation on Income and Wealth Distribution :

During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently:

i. Creditors and Debtors:

Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for 7 years.

The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees.

However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.

ii. Bond and Debenture-Holders:

In an economy, there are some people who live on interest income—they suffer most.

Bondholders earn fixed interest income:

These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate.

iii. Investors:

People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.

iv. Salaried People and Wage-Earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases.

Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase.

v. Profit-Earners, Speculators and Black Marketeers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made. It is clear that someone wins and someone loses from inflation.

These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people.

With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation.

Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learns to live with inflation” , the redistributive effect of inflation will be minimal.

However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc.

Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

b. Effect on Production and Economic Growth :

Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher doses of profit.

Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.

Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here.

We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.

Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a wide imbalance in the balance of payments account.

Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources.

Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation.

The German Inflation of 1920s was also Catastrophic:

During 1922, the German price level went up 5,470 per cent, in 1923, the situation worsened; the German price level rose 1,300,000,000 times. By October of 1923, the postage of the lightest letter sent from Germany to the United States was 200,000 marks.

Butter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay double the price listed on the menu when they observed it first!!!

During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.

Anyway, people are harassed ultimately by the high rate of inflation. That is why it is said that ‘inflation is our public enemy number one’. Rising inflation rate is a sign of failure on the part of the government.

Related Articles:

• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on Inflation: Meaning, Measurement and Causes

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Policies to Control Inflation

Last updated 23 Jan 2023

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In 2018, the average rate of consumer price inflation in the world economy was 3.8% (according to the IMF’s World Economic Outlook). In South Africa, inflation was 5.3%, Argentina 31%, Turkey 16% and Ethiopia 9%. In these countries, the annual rate of inflation was significantly higher than the world averaged and in countries such as the UK and the USA where inflation is around 2 percent.

Evaluate the economies policies that might be used to help reduce the rate of inflation in high inflation countries (25)

Inflation is a sustained increase in a country’s general price level measured by the annual percentage rate of change of consumer prices. There are two main causes of accelerating inflation. Firstly, demand-pull inflation comes from a situation of excess aggregate demand relative to a country’s productive capacity. When the output gap is positive, short-run aggregate supply becomes inelastic and therefore an outward shift of aggregate demand can lead to a sharp rise in prices as producers look to increase their profits. Secondly, cost-push inflation happens when there is a rise in production costs leading to an inward shift of the SRAS curve. This could happen for example when unit wage costs have increased (i.e. wages are rising faster than productivity) or when imported goods and services become more expensive in the wake of a depreciation of a country’s exchange rate.

Policies to reduce the rate of inflation are likely to be most effective when they address the main causes and these policies can focus either on short-term causes or longer-term factors.

Monetary Policy

In a situation of high inflation, monetary policy can have a key role to play. The standard response of a central bank would be to raise official interest rates. This is an example of a contractionary or deflationary policy. Higher interest rates reduce aggregate demand, leading to a slower rate of economic growth and (eventually) lower demand-pull inflation. For example, higher interest rates might makes mortgages on property more expensive to service which has the effect of dampening down the rate of growth of house prices via a fall in housing demand.

A period of higher relative interest rates also causes an appreciation of the exchange rate which has the effect of reducing the price of imports and making exports more expensive. In 2018 for example, faced with a sharply-depreciating currency, Turkey’s central bank increased the main policy interest rate to help stem a rapid outflow of hot money from their financial system. In South Africa, the central bank has been raising interest rates gradually to a high of 6.75 percent as part of their inflation control strategy

Higher interest rates squeeze aggregate demand and can help reduce the size of a positive output gap. As part of monetary policy, the central bank might also Introduce a lower inflation target: Many countries have an inflation target (e.g. UK CPI inflation target of 2%). One argument in support of this is that if consumer and businesses believe the inflation target is credible, then it will help to lower inflation expectations. And if inflation expectations are reduced, it becomes easier to control inflation because fewer people will be asking for hefty wage increases.

Trade policies

In some countries, retail prices are kept artificially high because of the effects of import tariffs and import quotas. One policy option for a government might involve gradually lower import tariffs, perhaps as part of a wider trade agreement with other countries. A smaller tariff could have the effect of reducing import prices leading to an outward shift of short run aggregate supply. The costs of imported raw materials, component parts and finished consumer goods fall leading to a deflationary effect on the general price level. This might be shown in an analysis diagram by an outward shift of short run aggregate supply.

A potential downside of this approach is that domestic firms would then face tougher price competition from overseas suppliers and there might be a contraction in home-based production, employment and investment. The government would also be giving up some tax revenues from import tariffs which for a number of emerging/developing countries can be a significant source of tax income. Reducing trade frictions can be an effective policy to bring down the rate of inflation although domestic businesses would need to increase their efficiency to be able to compete with cheaper goods and services from overseas.

Supply-side policies

Supply-side policies are measures designed to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs and therefore helping to control inflation. These policies might include government tax relief for business investment and also state funding to fast-forward major infrastructure projects in sectors such as transport, energy and power supply, telecoms and health care. Ultimately, if supply-side policies provide successful, then more new firms will enter markets (increasing industry supply and driving down prices) and labour productivity will increase helping to control the unit costs of businesses so that fewer of them are under pressure to raise prices. Effective supply-side policies lead to an outward shift of the long-run aggregate supply curve and help provide the conditions for a period of non-inflationary growth. However, they are unlikely to have much effect on the rate of inflation in the short term. In this sense, monetary policy has a more important role to play in controlling price increases.

Monetary policy in some countries is also accompanied by a policy of wage controls or wage freezes. Trying to control wages could, in theory, help to reduce inflationary pressures. In the UK, the UK government has in recent years operated with a public sector pay policy that has limited annual pay rises for several million workers to just 1 percent a year - this has meant that nominal wages have failed to keep pace with inflation leading to a steep fall in real wages and also relative pay compared to many private sector jobs.

Final evaluation

Overall, monetary policy has the main job of keeping inflationary pressures in check during the economic cycle whereas supply-side policies have an important role to play in keeping costs and prices down over the longer-term. It is important to note that there are limits to the effectiveness of policy when it comes to lowering the rate of inflation. The annual rate of price increases in most countries is susceptible to external shocks such as volatility in global commodity prices, unexpected movements in the exchange rate and the changing global economic cycle. Policy can influence prices but not necessarily determine them in the direct way that economics textbooks might imply.

• Inflation Targeting
• Inflation Expectations
• Creeping Inflation
• Cost-push inflation

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Home — Essay Samples — Economics — Inflation — Measures to Control Inflation

How to Control Inflation in Pakistan

• Categories: Inflation

About this sample

Words: 634 |

Published: Jan 15, 2019

Words: 634 | Page: 1 | 4 min read

Table of contents

Inflation essay outline, inflation essay example, introduction.

• Introduction to the issue of inflation in Pakistan

Controlling Inflation Through Monetary Policy

• Tightening monetary policy by increasing interest rates
• Impact of higher interest rates on borrowing, consumer spending, and inflation
• Currency value and import costs

Reducing Government Expenditure

• Strategies for reducing government spending
• Effect on demand and inflation

Increasing Taxes

• Using taxation to reduce disposable income
• Balancing tax increases to avoid worsening poverty

Promoting Local Production

• Encouraging local industries and businesses
• Impact on supply and inflation

Stabilizing Exchange Rates

• Maintaining exchange rate stability
• Reducing the prices of imported goods and services

Controlling Money Supply

• Methods to control the money supply
• Role of central banks and commercial banks

Managing Inflation Expectations

• Creating a stable and transparent environment
• Communication with the public

Implementing Structural Reforms

• Tax system, infrastructure, productivity, and public sector reforms
• Impact on competitiveness and supply
• Summary of the multi-pronged approach to controlling inflation in Pakistan

Works Cited

• Ahmed, A. (2021). Understanding Pakistan's inflation dynamics. Business Recorder.
• Government of Pakistan. (2022). Pakistan Economic Survey 2021-22. Ministry of Finance.
• Hussain, M. (2020). Inflation in Pakistan: Causes and possible solutions. The Express Tribune. https://tribune.com.pk/story/2250261/inflation-in-pakistan-causes-and-possible-solutions
• Khan, M. A. (2021). Pakistan's economy and inflationary pressures. The Diplomat. https://thediplomat.com/2021/01/pakistans-economy-and-inflationary-pressures/
• Khan, S., & Ahmad, H. (2020). Fiscal deficit, external debt and inflation nexus: Evidence from Pakistan. The Journal of Developing Areas, 54(3), 1-15.
• Khan, T. A. (2019). Impact of taxation on inflation: Empirical evidence from Pakistan. Pakistan Journal of Commerce and Social Sciences, 13(3), 693-713.
• Khattak, S. A. (2021). Pakistan's economic growth, inflation and fiscal policy. Journal of Economic and Social Thought, 8(1), 25-38.
• Majeed, M. T. (2020). Examining the relationship between inflation and economic growth in Pakistan. Bulletin of Monetary Economics and Banking, 23(1), 21-36.
• Qayyum, A., & Ahmed, A. (2021). An empirical analysis of inflation dynamics in Pakistan. The Pakistan Development Review, 60(1), 1-24.
• State Bank of Pakistan. (2022). Monetary policy statements. https://www.sbp.org.pk/monetary_policy/statements/index.htm

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Groceries are expensive, but they don’t have to break the bank. Here are some tips to save

If you’ve noticed that you’re paying more than before for the same amount of groceries, you’re not the only one.

If you’ve noticed that you’re paying more than before for the same amount of groceries, you’re not the only one. Inflation is easing , but grocery prices are still high — up 21%, on average, since inflation started to surge more than three years ago.

FILE - People buy groceries at a Walmart Superstore in Secaucus, New Jersey, July 11, 2024. (AP Photo/Eduardo Munoz Alvarez)

Eduardo Munoz Alvarez / AP

Unlike some other items, you can't just stop buying groceries when they get pricey. There's nothing you can do about inflation, but you can find ways to save on groceries so they don't heavily affect your wallet or your eating habits. These include using coupons, budgeting and buying in bulk.

Here's are some expert recommendations for saving on groceries:

Try coupons

Kiersten Torok started using coupons back when she was in high school, after her parents lost their jobs during the 2008 recession. She began relying on them even more in 2020, when she lost her own job during the pandemic. Now she's using her social media platform to help others learn how to save.

"When times like these come up, coupons are a necessity for so many Americans," said Torok, known on Instagram and TikTok as Torok Coupon Hunter .

Many might think that using coupons means cutting them out of a magazine. While you can certainly still do that, there are now easier ways to get the discounts. Many stores, like Walmart and Target, have coupons available on their apps.

“All you have to do is scan an item in a store, the coupons pop up on your app and then they automatically apply in the register," Torok said. "It’s become much more streamlined."

One of Torok’s coupon golden rules is: Never pay big for toothpaste — there's always a combination of coupons and offers available. For anyone who wants to try couponing, Torok recommends that you first start using them at your favorite store and never buy things you don’t need, even if there's a big discount.

Apps like Flipp , which lets you browse for coupons from all major grocery stores, and Ibotta , an app that gives you cashback for using coupons, can make your journey with couponing easier.

Track current spending

Making a budget is a key to keeping grocery spending under control, and the first step is to track how much you're already spending. Start by reviewing how much you have spent on the last few times you've gone grocery shopping, recommended David Brindley, deputy editor for AARP Bulletin .

If you don’t keep receipts from past grocery runs, try looking at your bank account statement and adding up the grocery charges. Once you know how much you spend on groceries, set a goal, for example, staying within a specific budget or reducing your spending.

Review what you already have

You need a plan, but before you make one, ensure you know what you currently have in your fridge and your pantry. Sarah Schweisthal, personal finance expert and social media manager at budgeting app YNAB , recommends taking everything out and making an inventory so you don't buy duplicates of things you already have on hand.

Brindley also recommends planning to cook multiple meals with similar ingredients, which saves money and also cuts down on food waste.

Make a plan

Once you’ve tracked your spending and inventoried what you already have, the next step is to make a plan. Write down the items you’re looking to buy and your estimated cost, making sure you stay on budget. Meal planning for the week or month can be a good way to stay on top of your spending, Schweisthal said.

Going up and down the aisles can sometimes make you crave things that you haven’t planned for, like a snack or a new dish. If you foresee that it’ll be hard for you to stick to your list, include some flexibility in your plan, such as allotting a specific amount to buy snacks or a random item you see at the checkout line.

“I think having flexibility in a plan actually helps you stick to it more,” Schweisthal said.

Making a plan can be as simple as writing down a list on paper or in your phone's notes app. Or, you can use apps that specifically help you with meal planning such as AnyList or Mealime .

Shop online

If you tend to wander off your grocery list because every time you go to the store you buy things you don’t need, shopping online and picking up curbside is a good workaround.

“I 100% recommend sitting down Sunday morning and just looking at the stores and comparing the items you need for the week, especially with things you can get for curbside pickup,” Torok said.

If you buy your groceries from multiple stores because each has better prices on some items, ordering ahead of time can also save time.

Involve your family in saving

If you are in charge of buying groceries for your entire family, it can be beneficial to include them in your grocery budgeting routine. For Torok, this has meant teaching her children how to scan coupons while they shop.

Since buying in bulk can be very cost-effective. Brindley also recommends that you team up with a friend or a family member to buy specific items in bulk and share the discount.

Food sharing apps

Lastly, you can save money by using food-sharing apps such as Olio, which connects people around their community to share extra grocery items, and Too Good to Go, where you can buy surplus food at a discount.

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

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How Inflation Affects Your Cost Of Living

Updated: Feb 7, 2023, 9:22am

Until recently, inflation was a far-off memory for most Americans. But that faded, distant memory has roared back to life over the past two years, imposing higher costs and painful choices on consumers.

After spending more than two decades below 3%, the consumer price index (CPI)—a key measure of U.S. inflation—nearly tripled from 2020 to 2021, rising from 1.4% to 7.0%. Inflation fell a bit, to 6.5%, in 2022.

Why Is Inflation Rising Right Now?

The U.S. hasn’t seen price gains like this since the era of hyperinflation in the 1970s and early 1980s. Monthly inflation data peaked at an annualized rate of 9.1% in June 2022, and it’s cooled off somewhat since then.

“The high inflation we’re experiencing today is likely brought on by a combination of factors including a strong post-Covid recovery, lingering supply chain issues, the war in Ukraine and its effects on energy and food prices, Fed rate hikes and gains in wages after years of low growth,” says Matt Fleming, a wealth advisor executive at Vanguard Personal Advisor Services.

Meanwhile, stimulus checks and the suspension of student loan payments during the pandemic gave Americans an unexpected opportunity to save money, says Michelle Griffith, wealth advisor for U.S. Consumer Wealth Management at Citi.

“But after social distancing and the shelter-in-place mandate came to an end, spending started up again, and inflation reared its head,” says Griffith.

While Fleming says inflation has peaked in most markets and should keep trending lower, he believes it will take much longer to dispel the pressures that created higher prices in the first place—things like historically low unemployment and higher wage growth.

What Causes Inflation?

Inflation occurs when changes throughout the economy drive prices broadly higher, reducing consumer purchasing power. This means that each dollar you earn buys fewer goods and services.

The root cause of these broad-based price increases are imbalances in supply and demand. There are three primary reasons demand may outpace supply: supply shocks, increased money supply and consumer expectations.

During the Covid-19 crisis, consumers were kept at home by shelter-in-place orders and thus less inclined to spend money on discretionary activities, but spent more money on buying goods.

The world experienced severe supply shocks during the pandemic, making it hard for supply to keep up with demand. Luckily, spending for much of the pandemic was reduced as people were forced to stay home, giving Americans an unexpected opportunity to save.

According to Griffith, when consumers start saving up cash, it can eventually lead to enthusiastic spending sprees, which can drive higher prices and more inflation. And that’s exactly what happened when stay-at-home orders were dropped and people could resume social activities.

Another cause of excess demand that leads to rising prices are inflation expectations . If workers expect inflation to rise, they may demand higher wages to compensate, which may prompt businesses to raise prices in turn, thus creating a “wage-price” spiral.

Inflation vs Cost of Living: What’s the Difference?

Inflation and cost of living are interconnected concepts, but they are not synonyms. Inflation describes a gradual increase in prices, while the cost of living is a snapshot of how much a person needs to spend at any given moment in time.

“When inflation rises, so do the costs of goods and services, which, in turn, erodes purchasing power,” Fleming says. “This is particularly troublesome for those with lower fixed incomes, as inflation can rob their ability to afford necessities like food, housing, medications and transportation.”

To compensate for inflation’s erosion of purchasing power, retirement benefits providers may offer cost-of-living adjustments (COLAs).

• Inflation. This is how much prices for goods and services increase over time. The Bureau of Labor Statistics (BLS) uses the CPI to track the rate of inflation. There are CPIs for the entire U.S. as well as specific geographic areas and utility, gas and food items. Changes are reported on a monthly basis as percentage increases or decreases in the CPI.
• Cost of living. This is how much it costs to maintain a certain standard of living in a given place at a certain moment in time. It’s usually calculated by averaging the costs of specific goods and services required to meet that standard of living. The government uses regional and national CPIs to determine the cost of living in specific areas.
• Cost-of-living adjustments. COLAs are adjustments to specific benefit payments, such as Social Security , to keep pace with inflation. Without COLAs, retirees would still be receiving only $157.70 in monthly Social Security benefits, as they did in 1975. This would be unfair since $157.70 could buy a lot more in 1975 when gas cost $0.57 per gallon.

Inflation Factors that Affect the Cost of Living

Inflation can impact the price of everything you need for daily living, from food to housing to what it costs to fill your tank so you can drive to work or put clothes on your back.

For example, here’s how the prices of common household items increased in December 2022 from the same period one year ago:

How Is Inflation Affecting the Housing Market?

Inflation can have a similar effect on the housing market as it does your cost of living. Shelter accounts for nearly one-third of the inputs for CPI inflation and 40% of core CPI that excludes food and energy, so even small increases in rents and home prices can impact inflation.

“The housing market has been impacted by inflationary pressures on multiple levels including higher material and labor costs combined with rising interest rates and mortgage expenses, which have weighed on affordability,” says Sid Vaidya, chief investment strategist for U.S. Wealth at TD Wealth.

Rising rates have priced some buyers out of the market, but he says there’s still reason for hope.

“While inflation continues to linger at elevated levels across most advanced economies, recent data has provided some initial signs of relief from improving supply chain conditions and softening raw input prices,” Vaidya says.

No one can predict with certainty how high inflation will rise or when it will end. The one thing most experts agree on is that planning ahead is crucial.

Having an emergency fund can give you the cushion and confidence to keep your longer-term savings fully invested, which is crucial to keeping pace with inflation.

“Stay focused on your goals and enjoy the long-term benefits of a diversified portfolio,” Fleming says. “Transition periods can be painful in the moment, but instead of focusing on recent losses, focus on the gains you’ve likely seen in your portfolio over the past decade.”

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Coryanne Hicks is an investing reporter, finance writer and ghostwriter whose work appears in Forbes Advisor, U.S. News & World Report, Kiplinger, Business Insider publications. Hicks has ghostwritten white papers and financial guidebooks for dozens of industry professionals. Her U.S. News video series on how to start investing at any age won an honorable mention at the 2019 Folio: Eddie & Ozzie awards for best Consumer How-To video. She was also a 2019 SABEW Goldschmidt fellow for business journalists. Previously, Hicks was a fully-licensed financial professional at Fidelity Investments.

Essay On How to Control Inflation in Pakistan

by Pakiology | Jul 20, 2024 | Essay | 0 comments

Inflation is a persistent rise in the general price level of goods and services in an economy over a period of time. It has a profound impact on the purchasing power of individuals and affects the overall economy of a country. In Pakistan, inflation has been a persistent problem, and all segments of society have felt its effects. The inflation rate in Pakistan has reached double-digit levels, causing severe economic difficulties for the average person. In this article, we will discuss the causes of inflation in Pakistan and offer practical solutions to control inflation and stabilize the economy.

Page Contents

Understanding the Roots of Inflation in Pakistan

Mitigating the effects of inflation through monetary policy, tackling inflation through fiscal policy, enhancing agricultural productivity to control inflation, empowering the private sector to foster economic growth, conclusion:.

Inflation in Pakistan is a complex issue that has several root causes. Some of the major causes of inflation in Pakistan include:

• Overpopulation and the demand-supply gap
• Shortage of electricity and gas
• Political instability and weak governance
• Currency devaluation and high inflation expectations
• Trade deficit and external shocks

Monetary policy is the primary tool used by the central bank to control inflation in Pakistan. The State Bank of Pakistan (SBP) can use several monetary policy tools to reduce inflation, including:

• Reducing the money supply
• Regulating credit and lending
• Strengthening the exchange rate

Fiscal policy refers to the government’s approach to managing its revenue and expenditure. To control inflation in Pakistan, the government can implement several fiscal policy measures, including:

Reducing government spending Increasing taxes and duties Implementing price controls Encouraging investment and economic growth

Agriculture is a crucial sector in Pakistan, and its growth and productivity are essential for controlling inflation. The government can implement several measures to increase agricultural productivity, including:

• Providing subsidies and incentives to farmers
• Improving irrigation systems and water management
• Encouraging the use of modern technologies and techniques
• Improving market access for farmers

The private sector is the driving force behind economic growth and development. To control inflation in Pakistan, the government can implement several measures to empower the private sector, including:

• Encouraging entrepreneurship and innovation
• Improving the business environment and reducing red tape
• Encouraging foreign investment and trade
• Providing access to finance and support services

How does inflation affect the economy of Pakistan?

Inflation reduces the purchasing power of individuals, leading to a decline in consumer demand and economic growth. It also contributes to rising costs of production, reducing the competitiveness of domestic goods and services in the international market.

What is the role of monetary policy in controlling inflation in Pakistan?

Monetary policy is the primary tool used by the central bank to control inflation in Pakistan. The State Bank of Pakistan can use various monetary policy tools, including increasing interest rates, reducing the money supply, and regulating credit and lending, to control inflation.

What are some of the fiscal policy measures that can be used to control inflation in Pakistan?

To control inflation in Pakistan, the government can implement several fiscal policy measures, including reducing government spending, increasing taxes and duties, implementing price controls, and encouraging investment and economic growth.

How can agriculture play a role in controlling inflation in Pakistan?

Agriculture is a crucial sector in Pakistan and its growth and productivity are essential for controlling inflation. The government can implement several measures, such as providing subsidies and incentives to farmers, improving irrigation systems, and encouraging the use of modern technologies, to increase agricultural productivity and control inflation.

Inflation is a persistent problem in Pakistan, affecting the purchasing power of individuals and the overall economy. The root causes of inflation in Pakistan are complex. Still, they can be addressed through a combination of monetary and fiscal policy measures, as well as enhancing agricultural productivity and empowering the private sector. By implementing these measures, the government can take steps to control inflation, stabilize the economy, and improve the standard of living for all citizens. It’s crucial for policymakers to work together to tackle the inflation epidemic and ensure a bright future for the people of Pakistan.

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