How can a country fight inflation?

Question

Usually if a country is having inflation how can it bring things back down to scale?

Answer 1

Inflation is caused when money loses it's buying power. This is can be due to a number of reason, one of which may be the over production of legal tender. If this is the case then a reduction in the number printed bills made will help to bring the value back up. This is generally called deflation. Debt, war and other issues that cause a drastic financial blunder can also cause the inflation wrecking ball to swing. Those issues are a little more sensitive and a little bit harder to figure out.

Answer 2

Inflation can be controlled by reducing the flow of money. If people have less money in their pockets then they will tend to spend less... this brings down the demand. To increase the demand the price of the commodity comes down which helps in controlling inflation.

One of the most common ways to reduce the money flow is to increse the intreset rates in banks. People will thus try to save more money and thus the money in their hands is reduced.

Answer 3

There are two common ways to expand the money supply.  The first is for the central bank to print more money, and the second is to have the government and financial institutions loan more money, usually by reducing reserve requirements, or,in the government's case, issuing bonds for what it wants to buy.  

The main ways to fight inflation operate by countering these inflationary moves.  In the case of the central bank printing more money, the easy solution is to stop doing it.  It is difficult, however, to confirm that a country has stopped creating additional nominal currency, however, so to convincingly combat inflation, countries often choose an exchange rate target against a widely traded reserve currency (say, the dollar) and promise to redeem the local currency in the reserve currency going forward.  Several countries with runaway inflation have done this in the past with some success.

Another strategy to stem inflation is to limit the amount of credit that lenders can offer by increasing the reserve rate, or the amount of hard currency that a financial institution must keep in order to make loans.  By raising the reserve rate, a deflationary pressure can be put on the economy, since the money multiplier has been reduced.  For example, if there is $100 in currency and banks are required to keep 50% reserve for all loans, then the maximum amount that can be created by the financial system is $200 ($100/.5).  If the reserve requirement is decreased to say, 10%, then the financial system can create $1,000 ($100/.1).  

Usually, the first approach is the one that weak economies use, since they have little credibility on their own, and therefore use a trusted outside entity (like a larger economy) to force themselves to stay in check.

Answer 4

First Answerer does have the correct answer.

When US currency used to be backed by silver (you could go to the treasury and demand them to pay you an ounce of silver for 1 dollar) the inflation rate was really low and only went up as fast as the economy (as wealth increased). Any time wealth increases inflation rises. Inflation is due to amount and distribution.  When the America's were being discovered one of the Spanish conquistadors did strike it rich and brought back tons and tons of gold. What was the result? Increasing wealth and amount of gold circulating through europe which cause inflation. Gold became more common and easier to aquire.

Now in all this I am saying that inflation can happen at any time.

BUT TODAY

Money is NOT backed by the government so they can print as much as they like. What they don't realize is that the more dollars kicking around the US the more inflation and the less valuable the dollar becomes BECAUSE there are so many dollars. It is easier to get a dollar.

Inflation is also caused by banks and credit cards. But that is a very very long and controversial topic that I won't go into.

Inflation in the US was not a problem until FDR screwed us over. He made it illegal to possess precious metal currency (gold at that time) and made everyone turn their gold in. He made it a crime to possess gold period as an average citizen. Then a few months after everyone turned in their gold, he artificially jacked the price of gold and started printing more money because he didn't have to back the dollar with anything.  

So really the dollar bill is a useless piece of paper with a "promise" from the government...but the promise doesn't specify what it is promising us.  It used to promise us gold and silver which has REAL value.   Now....who knows.

Answer 5

Usually a country adjusts monetary policy to battle inflation.  Most countries achieve this with just changes to interest rates. To "slow down" an economy (reduce inflation) the government will increase the bank rate causing credit to be more expensive hence slowing down growth and inflation.

In dire times the government can also set wage and price controls to keep wage and prices from rising too fast.  This is normally only done in 3rd world countries

Answer 6

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.

Answer 7

Often times, the most inflationary thing that a country does is continue to print money. It has happened so many times in so many places that it isn't even funny. Germany was one of the worst culprits, as it had a period in which paper money became so common that workers had to be paid four times a day so that they could spend their earnings before inflation eroded them. So, one of the first things India should do is stop printing money. The ultimate way to fight inflation is to keep the money supply in check and to focus on growing the economy. Ultimately, individuals are more worried about how much their money can buy rather than how much of the money they have. I would rather have $1 a week with bread prices of .01 than have $1,000,000 with bread prices of $500,000. While it appears I am richer with $1,000,000, I am actually poorer, because I can't buy as much. Thus, increasing production of useful goods and services is what India should focus on.

Answer 8

The one famous quote from one of the Nobel Prize winners in economics stated as follows: Staggering inflation is the monetary phenomena, simply because there are too much money circulating in our materialistic world. China has a lot of US dollars now and the inflation goes up rapidly.  In the economic perspectives, the financial and government want to have monetary growth in terms of higher GDP each year, investment in international funds (just like Fannie Mae and Freddie Mac), investment in natural resources of oil, gold, timber, and agriculture food products. Are you aware that Yahoo has advertised in the screen for more than two consecutive months for attracting investors put money into the food products and there are tons of advertisements and emails from the "International Living" in the real estate investment in many continents, natural resources of many kinds of profitable products, such as oil, precious metals, and agriculture food products.

I think the economic principle of demand and supply is the main reason for inflation. What's more? Simply because of the greed, selfish, and fear of human nature have brought the inflation by acting as the middle persons to strip out of actual prices and making much higher prices of the daily necessities. For instance, every one knows there are enough foods for every country in this world. How come there are many infants in the third world and, particularly the African countries are starved to dead. It is simply because of the wanted financial gains from the financial peoples in Wall Street, bankers of every country, Hong Kong stock Exchange, and many financial institutions worldwide. Are you aware that some investors in Parkistan did just set fire to the financial institute or stock exchange because most of them lost all their life savings. However, this is a good sign to show the inflation will decline or at least stand still for quite a while. In contrary, the bankers in many Hong Kong banks probably successfully  in making a solid return for the investors invested monies in the Agricutural food funds. That's why the food prices go up dramatically in the past six months in Hong Kong.

The only one hope to stop the inflation is by destroying the stock market and monetary growth funds indirectly and smartly without letting the financial personnel and investors know. Real estate development and transaction is also the reason of bring up the staggering inflation of every thing. Can the government do this in our materialistic world? I think it is impossible for the Hong Kong fascist government. How about the US and China?

Answer 9

Okay, one thing you must know is that you can't

More people are born everyday

More oil consumers are raised everyday

Everyday there are thousands of new mouths to feed around the world are born

Therefore demand for basically everything goes dramatically up literally everyday!!  And resources run out a lot.  So to stop inflation, tell all of the men to tie their tubes or take a cold plunge every half hour, and tell all of the women to tie the tubes or put a cork in it!  If the whole world listens to you then great!  You dramatically slowed down inflation

We are reaching our worlds carrying capacity, soon the world will no longer be able to hold us

Answer 10

When you say "country" do you mean the government or the people? Because depending on the country's debt and its individual methods of paying off that debt, the government can only raise taxes or introduce new incentives to various sectors. The people on the other hand are capable of deciding the value of physical money. When inflation gets to the point of carrying wheelbarrows of notes to the store for a loaf of bread, wouldnt it make more sense to grow the food ourselves?

Answer 11

Decrease the money supply, increase taxes. Everything in economics is about balance. A balance between consumer spending and saving is what everything, basically, hinges on. However, the US is currently fighting both an impending recession (not a current one) and slight inflation. It is hard to curb both dilemmas at once because they are opposite problems and require solutions that may negate each other. Increasing the money supply helps to fight a recession.

Answer 12

1. Stopping illegal immigration. Illegals reap the benefits of    the country but don't pay taxes.

2. Stop fearing a recession and invest in the market by buying goods and services. By putting money back into the economy you thus increase the value of a dollar and then increase consumer confidence.

3. Keep roads, highways, sidewalks, etc., beautified to help attract tourism and bring additional monetary into a growing economy.

Answer 13

It's a delicate balance and since 'deflation' is even more dreaded, we probably will never see an extended period of non-inflation as managed by the 'Fed'.  A healthy savings rate -- which this country can't 'officially' seem to achieve -- makes loanable funds available for growth and helps stem inflation.  'Officially' seems not to take into account the billions put into 401-k's, their derivatives, IRAs and other pension funds.  Those funds are probably borrowed to be used to fight wars.

Answer 14

First we need to understand inflation. There are many different definitions and theories of thoughts from the world of economists on what inflation means. However the man on the street understands that basically there is too much currency floating around in the system causing a devaluation of the dollar and leading to increased prices.

Unfortunately unions often times fight for increased wages because of rising prices however this only further increases inflation because prices continue to rise.

The most significant thing the government can do to decrease inflation is to reduce the availability of money in the system.

The approach will include:

Price regulation - regulating prices so that they fall within a band where the business owners may still make a profit but yet not take advantage of the situation

Regulations on commercial financial lending institutions - Increase the difficulty for obtaining a loan by increasing the interest rates and insisting on larger securities for loans. Making it harder to get a loan helps to curb the flow of cash in the system

Incentives for saving - Monies in fixed deposits are monies that no longer freely flow in the system and will prove beneficial to the end users especially once the economy stabilizes once more.

These are some of the ways the government may use to bring back the economy and there are a few more sophisticated strategies as referenced by some of the other answerers. However these apparently simple strategies though very effective require a great deal of cooperation between the government and the corporate world for the better good of not just the poor man but the country on a whole.

Answer 15

To fight a recession a government must spend money on programs and generally put more money into the economy.

To fight inflation a government has to cut back on spending and cut programs.  The problem with doing this is what politician in their right mind is going to run on a platform of "If elected I will eliminate government sponsored programs for the citizens of this country, programs for farmers, manufacturing, and I will eliminate government jobs."  Yeah we wouldn't elect that guy either and that's why we're seeing the problem get so bad lately.

Answer 16

We could fight inflation by balancing the budget. During the economic expansion of 2003-2007, we should have been running a surplus; however, the war in Iraq caused us to run a deficit, driving the dollar down and inflation up.

Another inflation fighting tool is raising interest rates. The housing bubble has put the fed into a trap because raising rates would hurt banks by causing more homeowners to default, but the lower rates are driving our currency down further. Since commodities are denominated in dollars, we are seeing rising commodity prices, driving more inflation. Irresponsible homeowners and lenders are hurting the rest of us by forcing the fed to lower rates when they should be raising rates to stabilize the currency. Eventually we will have to bite the bullet as we did in the early 80's, but it will take a fed chairman like Paul Volker, one with courage.

Bottom line - leave Iraq and raise interest rates, inflation will come down, but people will feel some pain. Better to bear the responsibility for a problem we created instead of passing it to our children. I also like Obama's plan to implement payroll taxes on incomes over $250,000 to help pay for social security. Such a move would without question take away the fear the the government will have to bail out ss and probably add additional credibility to the currency. An Obama presidency will certainly be better for the dollar and lower inflation.

Answer 17

The first answer here is wrong.  Net growth of inflation is influenced by money supply, but a reduction in supply would increase inflation.  Interest rates are the most powerful tool in fighting inflation - by increasing interest rates, it discourages borrowing which in turn discourage consumer spending, thus slowing down the rate of inflation.

In moderation, inflation is a good thing - it means the economy is growing.  Deflation means the economy is shrinking, which is bad.

Answer 18

a country cannot bring things back to scale. Inflation happens in every country every year. Inflation is caused by the consumers in the country spending too much and the high street shops increasing their prices to take advantage of the popularity of their product. That why a mars bar goes up 2p every year but people keep buying it so they will continually increase the price every year. To bring things back down to scale you have to stop spending, which is impossible so inflation is inevitable.

Answer 19

The main options would be to raise taxes, decrease gov't spending, and raise the federal reserve ratio (the ratio of bank held money : loans outstanding), and sell government securities (bonds)

Usually the problem if hyperinflation (large inflation over 30%) is involved is that the government is printing too much money, Like Germany tried to do during WWII when they ran out of money. They printed more, but everyone else became poor as the money lost its value. So usually the way to fight inflation is to stop printing the money that got them into massive inflation anyway.

Answer 20

First we have to analyze the critical source of this inflation. Could it be shortage of food? water? or any other resources? Well, the main explanation for the current rapid inflation occurring is due to the fact that merchants have been meddling with the oil in the market. As we all know, the predominant ration as to where oil prices are rising is because of the Iraq war. US is spontaneously bombarding this territory to retrieve their oil resources so they could monopolize their oil industry. Oil merchants predict that oil prices would skyrocket at this point, so they pre-order tons of oil at the current price and release them when the prices rise. This caused the shortage. With both shortage and value upgrade of oil, the prices continue to double every 2 and a half year. Oil relates to many things in our life - transportation and shipping goods. This causes inflation in other itinerary in the area. This impact will globalize and inflate prices around the world. There is actually no methodology to erase inflation in a region, but there is prevention measures that could be done. The government could predict threatening crisis and perhaps promote and open up trade or tourism industry to keep suffice cash flowing in their country. This could fade off some noctorious effects of inflation.

Answer 21

If America is who you are talking about, then I would say the one single thing that would make the most difference would be to bring our artificial fuel crises to an end. Everything on the shelf in any store took fuel to make, and deliver to market, so with higher fuel prices, its price will also have to be higher.

Fuel prices are a double edged sword, as they are draining the pockets of Americans, and we don't spend as we used to, so this is creating layoffs, and more bankruptcies...

Everyone quits eating at the restraunt on the corner to tighten their budget, and the next time you drive by the windows are boarded up. Snowball effect.

If our government doesn't get it's head out of it's a$$, we will either all be billionares soon (and a bag of chips will cost $400,000) , or  the dollar will be equal to or less value than the Peso. If the dollar drops much further the world will likely quit using the dollar, and switch to using Euro's as it's currency.  America will find itself in a worse than 1929 depression overnight.

We are sending too much of our money overseas when we could drill for oil here, and utilize our own resources.

Fuel speculators should all be arrested for treason! It is no longer free market trading when it takes a nation down!

Answer 22

Inflation is caused by the supply of money being too abundant.  There are a number of ways to fight inflation, none of which work perfectly well.

Encouraging money to be hoarded is one way to go about reducing inflation.

One of the least effective, but also least harmful is to issue commemorative coins.  Money is supposed to be "Fungible" meaning that it's worth what it says it is, but when you begin issuing commemorative coins for various reasons, people may collect them, or refuse to accept them.  In effect, some of the collectible money goes out of circulation.

The use of vending machines will also leave some cash locked up in these devices for longer periods, in effect, this currency is hoarded.  If the vending machines only accept certain denominations, this can reduce the "Fungibility" of the money as well, and works somewhat like making commemorative coins.

However, the private sector often is a major source of inflationary practices these days, and regulating some of their actions is often necessary.  Credit cards, checks, gift certificates, foreign money exchange, calling cards, barter systems, non-governmental parcel services, tokens, and other commodities that can be used like money essentially serve as a private form of money.   Unless care is used, these can completely overthrow any workings the Government has put into effect.  Some of these can be useful to the government, others are too hard to regulate to be of any service.

A country should keep a keen eye on how credit ratings are achieved, and ought to have a hand in any gift certificates, tokens, or store credit.

Answer 23

if there is also recession and the  country is in stagflation, then the only thing to do would be to increase aggregate supply with improved technology, cheaper resources, more resources, etc.  If there is not a close recession, the aggregate demand could be decreased by either fiscal or monetary policy.  Fiscal policy: government spending decreases or taxes increase or a combination of the two.  thus, consumers are spending less and obviously, government is spending less.  Monetary policy: the federal reserve raises discount rate or require reserve ratio, or by selling government bonds. raising the discount rate and reserve ratio discourages loans and business investment/spending.  selling bonds shrinks the money supply because money is exchanged for bonds.  the most likely thing the government would do to fight inflation is to sell bonds.  open market operations are done daily and the easiest and most responsive method for the fed.

Answer 24

There are three major ways.

First is the inflation with respect to other currencies. The way to fight that is to produce more exports than imports than another country, then your money deflates with respect to that currency.

The Fed also controls a more domestic type of inflation. By lowering the lending rates they can increase the amount of lending that is done, and lending creates money out of thin air, which is later destroyed when the loan is paid off, however the interest is not destroyed and results in new money.

Or they can just print less. China is doing the opposite of this, and that is why people are expecting China to collapse later on.

Answer 25

In economic terms, you can increase the aggregate supply or reduce aggregate demand for the country. Both thing would cause for price level to decrease which would mean less inflation.  You could also decrease the money supply by raising reserve ratios at banks, increasing the interest rate, and selling more government bonds.  All these things could lower inflation.  Also, according to the Phillips Curve, in the short run, you can decrease inflation by increasing unemployment since the graph suggests an inverse relationship between the two.

Answer 26

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.

Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

Answer 27

- Stop printing money.

- Raise interest rates in banks so that people save up.

- Engage in controlled mass production (unless you want another Great Depression)

- Encourage people to purchase goods produced within the country.

- Create more jobs.

- If possible, impose trade barriers on MNC's based in your country so that more of what they produce is sold in your country thereby reducing rates for those goods.

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Those are solutions, but we know prevention is better than cure, so a country can take these steps to make fighting inflation easier in the future:

- Become more self-sufficient. Countries that are self-sufficient usually have an easier time with inflation, though I wouldn't exaggerate things to the rate that we could call them enviable. While it isn't THE solution, being self-sufficient certainly helps.

- Being energy-efficient, having low emission rates and having more cheap alternate sources of energy helps too, in case of an energy or oil crisis.

Answer 28

Often times, the most inflationary thing that a country does is continue to print money. It has happened so many times in so many places that it isn't even funny. Germany was one of the worst culprits, as it had a period in which paper money became so common that workers had to be paid four times a day so that they could spend their earnings before inflation eroded them. So, one of the first things should do is stop printing money. The ultimate way to fight inflation is to keep the money supply in check and to focus on growing the economy. Ultimately, individuals are more worried about how much their money can buy rather than how much of the money they have.

Answer 29

A number of measures will be needed to bring inflation under control.  Not least of these is the wage claims being made by sections of the community.  

Borrowing will make a temporary difference but that will have to be repaid, at a cost to taxpayers.

Reducing the money supply will do some good but those with and those without will not be happy.

Reducing spending on Government projects will help but those expecting the subsidy will be disappointed.

Cancelling the Rate Rebate, Council Tax Relief and payments to the Disabled (only those that are malingerers) will help but not enough and at the expense of misery.

Anything the Government does to redress the negativity of the economy will hurt someone but should we accept this?

If it is the best plan, yes.  However, inflation is a very tricky subject and economists are needed, any takers?

Answer 30

In a broad sense, with the giant economies that our world contains, it's more of an attempt at slowing, closer to stopping inflation; rather than reducing it.

If a country is relatively poor, inflation can usually be fought through increasing supply.

If a country is like America, they could stop accumulating debt from other countries, just to buy that countries' products! They're adding to an everlasting cycle, but giving loaned money back. American has a "macho" ideal to it somewhere, in that we can help everyone, but we really need to start helping ourselves.