Inflation works in different ways as it can be either positive or negative, depending on the industry. Whenever a locality finds itself in an inflation state, the goal is to reverse that situation so the economy can thrive again. But most economies suffer because of inflation as it tends to undermine consumers’ purchasing power and local currency.
What is Inflation?
Inflation is defined as the “general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money” [Source].
What Causes Inflation?
The most common cause of inflation is the implementation of wrong economic policies within a locality [Source]. Policies are vital since they allow businesses to run and regulate an industry’s demand and supply chain. Wrong policies tend to stress out businesses, leading to the closure of many businesses and companies. Also, too much government intervention can lead to inflation, especially in a dictatorship environment. Some ruling administrations tend to impose prices on businesses or inflict monopoly, affecting the whole industry. Another chief culprit of inflation is sabotage by the economic players when they feel disgruntled by their government. Most countries experience inflation due to the inability of their ruling parties to sustain the economy, which is largely blamed on corruption. External influence from interested private companies and countries can also cause inflation in a certain area. Other general causes include increased money supply, especially in countries that have the power to print their own money, rising wages to please workers, devaluation of a country’s currency, managing the national debt, mismanagement of resources, and unstable exchange rates whereby one currency becomes the inferior one, so people feel the need to phase it out by making it obsolete on the market.
Does Inflation ever Reverse?
Being plunged into inflation is a red flag for any economy, especially in developing countries or small cities with their industry. The reverse side of inflation is referred to as ‘deflation,’ defined as the “reduction of the general level of prices in an economy” [Source]. Deflation is also a decrease in the price level of commodities, goods, and services. The ultimate state of deflation is only achieved when the inflation rate falls below 0%, and many countries can only dream of such an economic state.
Economists argue that inflation can be reversed after intense analysis of what would have caused inflation in the first place. A popular example of a reversed inflation in Germany after it experienced a hyperinflation condition after World War I. But Germany resolved this situation through a currency reform [Source]. Under President Reagan, the US also stopped inflation acceleration by restricting bank reserves to reduce bank loans and raise interest rates. FDR’s New Deal offers viable solutions for reversing the effects of inflation, such as deficit spending, lower taxes, and lower discount rate.
Others argue that inflation is, in fact, price inflation and not economic inflation. To deal with price inflation, a country or administration can stop inflating the money supply, which can starve the economy of excess money and regulate itself. This removes a certain amount of money from circulation, which is necessary to reduce the inflation rate. Countries that print money can easily stop printing and dishing out money. Some countries were able to fight inflation through wage and price controls.