Editing Inflation (section)

== Controlling Inflation ==

[[Monetary policy]] is the policy enacted by the monetary authorities (most frequently the [[central bank]] of a nation) to accomplish their objectives.<ref name="palgrave">Lindsey, D. E.; Wallich, H. C. (2018). "Monetary Policy". In: ''The New Palgrave Dictionary of Economics''. London: Palgrave Macmillan. Retrieved September 17, 2023.</ref> Among these, keeping inflation at a low and stable level is often a prominent objective, either directly via [[inflation targeting]] or indirectly, e.g. via a [[fixed exchange rate]] against a low-inflation currency area.

=== Historical approaches to inflation control ===

Historically, central banks and governments have followed various policies to achieve low inflation, employing various nominal anchors. Before [[World War I]], the [[gold standard]] was prevalent, but was eventually found to be detrimental to [[economic stability]] and employment, not least during the [[Great Depression]] in the 1930s.<ref name="Historical"/> For the first decades after [[World War II]], the [[Bretton Woods system]] initiated a [[fixed exchange rate system]] for most developed countries, tying their currencies to the US dollar, which again was directly convertible to gold.<ref>{{cite web |title=About the IMF: History: Cooperation and reconstruction (1944–1971) |url=https://www.imf.org/external/about/histcoop.htm |access-date=17 September 2023 |website=www.imf.org}}</ref> The system disintegrated in the 1970s, however, after which the major currencies started floating against each other.<ref>{{cite web |title=About the IMF: History: The end of the Bretton Woods System (1972–1981) |url=https://www.imf.org/external/about/histend.htm |access-date=17 September 2023 |website=www.imf.org}}</ref> During the 1970s many central banks turned to a [[money supply]] target recommended by [[Milton Friedman]] and other [[monetarist]]s, aiming for a stable growth rate of money to control inflation. However, it was found to be impractical because of the unstable relationship between monetary aggregates and other macroeconomic variables, and was eventually abandoned by all major economies.<ref name="Historical">{{cite web |title=Federal Reserve Board – Historical Approaches to Monetary Policy |url=https://www.federalreserve.gov/monetarypolicy/historical-approaches-to-monetary-policy.htm |website=Board of Governors of the Federal Reserve System |access-date=17 September 2023 |language=en |date=8 March 2018}}</ref> In 1990, New Zealand as the first country ever adopted an official [[inflation target]] as the basis of its monetary policy, continually adjusting interest rates to steer the country's inflation rate towards its official target. The strategy was generally considered to work well, and central banks in most [[developed countries]] have over the years adapted a similar strategy.<ref name=Holdingline>{{cite web |title=Inflation Targeting: Holding the Line |url=https://www.imf.org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm |website=www.imf.org |access-date=17 September 2023}}</ref> As of 2023, the central banks of all [[G7]] member countries can be said to follow an inflation target, including the [[European Central Bank]] and the [[Federal Reserve]], who have adopted the main elements of inflation targeting without officially calling themselves inflation targeters.<ref name=Holdingline/> In emerging countries fixed exchange rate regimes are still the most common monetary policy.<ref name=IMF>{{cite book |last1=Department |first1=International Monetary Fund Monetary and Capital Markets |title=Annual Report on Exchange Arrangements and Exchange Restrictions 2022 |date=2023 |publisher=International Monetary Fund |isbn=979-8-4002-3526-9 |url=https://www.elibrary.imf.org/display/book/9798400235269/9798400235269.xml?code=imf.org |access-date=12 August 2023 |language=en }}</ref>

=== Inflation targeting ===

{{Main|Inflation targeting}}
[[File:Federal Funds Rate (effective).svg|thumb|right|upright=1.6|The U.S. effective [[federal funds rate]] charted over fifty years]]

From its first inception in New Zealand in 1990, direct inflation targeting as a monetary policy strategy has spread to become prevalent among developed countries. The basic idea is that the central bank perpetually adjusts interest rates to steer the country's inflation rate towards its official target. Via the [[monetary transmission mechanism]] interest rate changes affect [[aggregate demand]] in various ways, causing output and employment to respond.<ref>{{cite web |title=Federal Reserve Board – Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=17 September 2023 |language=en |date=July 29, 2021}}</ref> Changes in employment and unemployment rates affect wage setting, leading to larger or smaller wage increases, depending on the direction of the interest rate adjustment. A changed rate of wage increases will transmit into changes in [[pricing|price setting]] – i.e. a change in the inflation rate. The relation between (un)employment and inflation is known as the [[Phillips curve]].

In most [[OECD|OECD countries]], the inflation target is usually about 2% to 3% (in developing countries like [[Armenia]], the inflation target is higher, at around 4%).<ref>{{Cite web |title=Inflation Reports |url=https://www.cba.am/en/SitePages/mppubl.aspx |access-date=2022-12-06 |website=www.cba.am |archive-date=December 6, 2022 |archive-url=https://web.archive.org/web/20221206004614/https://www.cba.am/en/SitePages/mppubl.aspx |url-status=live }}</ref> Low (as opposed to zero or [[Deflation|negative]]) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a [[liquidity trap]] prevents monetary policy from stabilizing the economy.<ref name="econjournalwatch.org">{{Cite web |last=Hummel |first=Jeffrey Rogers |title=Death and Taxes, Including Inflation: the Public versus Economists |url=https://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists |access-date=2023-11-19 |website=econjwatch.org |publisher=Econ Journal Watch: inflation, deadweight loss, deficit, money, national debt, seigniorage, taxation, velocity |page=56}}</ref><ref name="aeaweb.org"/>

=== Fixed exchange rates ===

{{Main|Fixed exchange rate system}}
Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies. A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation if the currency area tied to itself maintains low and stable inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.<ref>{{cite book |last1=Blanchard |first1=Olivier |title=Macroeconomics: a European perspective |last2=Amighini |first2=Alessia |last3=Giavazzi |first3=Francesco |date=2017 |publisher=Pearson |isbn=978-1-292-08567-8 |edition=3rd |location=Harlow, London, New York, Boston, San Francisco, Toronto, Sydney, Dubai, Singapore, Hong Kong, Tokyo, Seoul, Taipei, New Delhi, Cape Town, Sao Paulo, Mexico City, Madrid, Amsterdam, Muinch, Paris, Milan |chapter=Output, the interest rate and the exchange rate}}</ref>

As of 2023, [[Denmark]] is the only [[OECD]] country which maintains a fixed exchange rate (against the [[euro]]), but it is frequently used as a monetary policy strategy in developing countries.<ref name=IMF/>

=== Gold standard ===

{{Main|Gold standard}}
[[File:Two 20kr gold coins.png|thumb|right|upright=1.2|Two 20 [[Swedish krona|krona]] gold coins from the [[Scandinavian Monetary Union]], a historical example of an international gold standard]]

The gold standard is a monetary system in which a region's common medium of exchange is paper notes (or other monetary token) that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of [[Bullion coin|specie]] per currency unit. The currency itself has no ''innate value'' but is accepted by traders because it can be redeemed for the equivalent value of the commodity (specie). A [[Silver certificate (United States)|U.S. silver certificate]], for example, could be redeemed for an actual piece of silver.

Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.<ref>{{cite encyclopedia|last =Bordo|first =Michael D.|date =2002|url =http://www.econlib.org/library/Enc/GoldStandard.html|title =Gold Standard|encyclopedia =The Concise Encyclopedia of Economics|publisher =Library of Economics and Liberty|access-date =September 23, 2008|archive-date =October 5, 2010|archive-url =https://web.archive.org/web/20101005063134/http://www.econlib.org/library/Enc/GoldStandard.html|url-status =live}}</ref> Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by an intersection of however much new gold was produced by mining and changing demand for gold for practical uses.<ref>{{cite journal |last1=Barsky |first1=Robert B. |last2=DeLong |first2=J. Bradford |year=1991 |title=Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard |url=https://ideas.repec.org/a/tpr/qjecon/v106y1991i3p815-36.html |url-status=live |journal=Quarterly Journal of Economics |volume=106 |issue=3 |pages=815–836 |doi=10.2307/2937928 |jstor=2937928 |archive-url=https://web.archive.org/web/20150620163911/https://ideas.repec.org/a/tpr/qjecon/v106y1991i3p815-36.html |archive-date=June 20, 2015 |access-date=September 27, 2008|url-access=subscription }}</ref><ref>{{cite web |url=http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html |title=Why Not the Gold Standard? |last=DeLong |first=Brad |access-date=September 25, 2008 |archive-url=https://web.archive.org/web/20101018035441/http://www.j-bradford-delong.net/politics/whynotthegoldstandard.html |archive-date=October 18, 2010 |url-status=dead }}</ref> The gold standard was historically found to make it more difficult to stabilize employment levels and avoid recessions and was eventually abandoned everywhere.<ref name="Historical"/><ref>{{cite web |last=Abdel-Monem |first=Tarik |title=What is The Gold Standard? |url=http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml |publisher=University of Iowa Center for The Center for International Finance and Development |url-status=dead |archive-url=https://web.archive.org/web/20091121143147/http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml |archive-date=2009-11-21 }}</ref>

===Demurrage currency===
{{Main|Demurrage currency}}
[[Freiwirtschaft]] economists theorize that demurrage currency could eliminate both inflation and deflation. There tends to be some interest cost that is built into the goods and services that consumers tend to purchase,<ref name="lietaer-1990">{{cite journal |last=Lietaer |first=Bernard A. |date=July 1990 |title=A Strategy for a Convertible Currency |url=https://folk.ntnu.no/tronda/finans/others/interest-free-money-formatted.pdf |journal=ICIS Forum |volume=20 |issue=3 |publisher=International Center for Integrative Studies |access-date=4 May 2025}}</ref>{{rp|p=4}} so if demurrage currency eliminates interest rates, then prices are less likely to increase. Demurrage would also naturally cause the money supply to decrease, thus causing deflation. If a central bank issues and monitors demurrage currency as Gesell originally proposed, then it could replace all the money that disappears due to demurrage by printing money at a similar rate.<ref name="baynham-2023">{{cite web |url=https://www.noemamag.com/what-if-money-expired/ |title=What If Money Expired? |last=Baynham |first=Jacob |date=14 November 2023 |website=Noema Magazine |publisher=Berggruen Institute |access-date=26 April 2025}}</ref> The money printing could create just enough inflation to cancel out the natural deflation of demurrage, thus achieving an [[inflation target]] of 0%.<ref name="sidman-lecture-6-inflation">{{cite AV media |last=Sidman |first=Josh |date=3 April 2024 |title="Silvio Gesell: Beyond Capitalism vs Socialism" Class #6 |url=https://www.youtube.com/watch?v=1GjX4PCcTlU?t=918 |time=15:18 |type=Video |language=English |publisher=Henry George School of Economics |access-date=23 May 2025}}</ref>

=== Wage and price controls ===

{{See also|Incomes policy}}
Another method attempted in the past have been wage and [[price controls]] ("incomes policies"). Temporary price controls may be used as a complement to other policies to fight inflation; price controls may make disinflation faster, while reducing the need for unemployment to reduce inflation. If price controls are used during a recession, the kinds of distortions that price controls cause may be lessened. However, economists generally advise against the imposition of price controls.<ref>{{Cite web |title=Why Price Controls Should Stay in the History Books |url=https://www.stlouisfed.org/publications/regional-economist/2022/mar/why-price-controls-should-stay-history-books |access-date=2024-09-05 |website=www.stlouisfed.org |language=en}}</ref><ref>{{Cite web |last=Committee |first=United States Joint Economic |title=The Economics of Price Controls - The Economics of Price Controls - United States Joint Economic Committee |url=https://www.jec.senate.gov/public/index.cfm/republicans/2022/9/the-economics-of-price-controls |access-date=2024-09-05 |website=www.jec.senate.gov |language=en}}</ref><ref>{{Cite web |title=Price Controls: Still A Bad Idea |url=https://www.hoover.org/research/price-controls-still-bad-idea |access-date=2024-09-05 |website=Hoover Institution |language=en}}</ref>

Wage and price controls, in combination with rationing, have been used successfully in wartime environments. However, their use in other contexts is far more mixed. Notable failures of their use include [[Nixon shock|the 1972 imposition of wage and price controls]] by [[Richard Nixon]]. More successful examples include the [[The Accord|Prices and Incomes Accord]] in Australia and the [[Wassenaar Agreement]] in the [[Netherlands]].

In general, wage and price controls are regarded as a temporary and exceptional measures, only effective when coupled with policies designed to reduce the underlying causes of inflation during the [[Wage and price controls|wage and price]] control regime, for example, winning the war being fought.