Inflation can rise rapidly when business cycles go from expansion to contraction and money gets tight.
A typical approach to stimulate inflation is to take money out of circulation (increasing the velocity of money) in order to increase the demand for money and prices. As money is hoarded, inflation goes down, and sometimes even negative inflation can occur.There are a variety of methods used to fight this problem.
For example, in the United States the Fed introduces new money and lets it circulate, increases interest rates, or takes an equivalent measure. How countries manage to stabilize and reduce inflation is very important to their long-term growth. After a brief period of inflation, these countries often find themselves in a deflationary period. These periods of deflation eventually turn into recessions. Within these periods, the policymakers attempt to bring inflation down.
As a result, there are many possible measures used to combat inflation. A variety of counter measures are possible depending on a country’s economic history, monetary policy, and social and cultural characteristics. Other times, central banks will abandon attempts to control inflation.
There are some cases in which a central bank adopts an inflation target, meaning that it chooses an inflation rate that it thinks is best for the economy.
In this situation, the central bank has full control over monetary policy, including the setting of interest rates.
This is referred to as a price level target, and is common in countries with relatively stable, inflation-free economies.
There are many different ways in which a central bank may try to balance inflation with economic growth.
In some cases, a central bank will allow a predetermined rate of inflation, if it can keep the inflation rate within an acceptable range.
In other cases, the central bank might be forced to choose a single target.
In this case, a central bank will try to achieve this target using several different methods, including changes to the interest rate or the money supply.
The policies that countries employ to keep inflation in check can have a wide range of impacts on their economy.
A positive impact of this method is that governments can provide a safety net for citizens in the form of price controls.
This can be a powerful tool to keep inflation in check because citizens do not have the ability to accurately predict the value of their currency, so they have little ability to hoard currency for fear of its devaluation.
Another significant effect of inflation is that businesses need to continuously lower the prices they charge.
If a business attempts to raise prices to compensate for inflation, they are likely to find that customers will simply opt to spend the extra money elsewhere, such as buying other products from competing businesses, or to save it for a rainy day.
Venture capital firms are tightening the belts.