We look out at a beautiful day, sunny, warm and with just the right amount of breeze. It seems like a day to be enjoyed for its tranquility and beauty. Accordingly, it is both interesting and jarring to bring up a subject that has caused huge numbers of people much anguish: inflation.

The mere mention of the word strikes fear into the hearts of many. There have been many times in U.S. history when this has caused much destruction and anxiety from the ravages of this economic killer. The U. S. has been relatively free of rapid inflation for approximately 40 years. The last serious bout with inflation occurred around 1980; it was successfully dealt with under the leadership of Paul Volker, who was then chairman of the Federal Reserve Board. In the years since then, prices have increased at a very moderate pace. That means low single-digit percentage increases in consumer prices.

That changed this spring, when consumer prices started to increase more rapidly. It is important to remember one of Volker’s greatest achievements was to break the back of inflation. In order to do so, he drove interest rates to astronomical highs – 21-1/2 percent – and the country experienced several recessions.

Various columnists in the Wall Street Journal comment on the greater attention now being paid to inflation by financial institutions throughout the world: “The large central banks are relying on a household showing faith in their track record of keeping inflation low, and the expectation that there are enough underutilized workers available to keep wage rises in check. Other monetary authorities aren’t sure that they have yet earned that kind of credibility as inflation fighters and see higher risk that wage rises will surge.”

Whether or not there are significant price increases may not be as important as the expectations of those price increases in the consumers’ minds. Once the public starts believing that price increases are inevitable, they often take actions that guarantee that those increases will occur. They increase their purchases, thinking that by doing so, they will not be impacted by any future shortages that may occur.

It is not the shortages that occur from time to time, but the expectation of those shortages that now dictates their decisions on what goods to buy. Inflation, by successfully infiltrating markets, can create a way of thinking that pushes the consumer to buy now and save later.

This is just one of the ways that inflation, actual or expected, will incline the consumer to spending rather than investing. If this attitude becomes generalized, the consumer is pushed to consume rather than to invest. By doing so, the country’s rate of economic growth can be adversely affected. This kind of outcome can become very worrisome to economic policy chiefs. If you can have consumers ready and eager to buy and they follow these inclinations, then investment starts to shrink and panic buying increases. The consumers start to think and act in ways that are likely to be harmful for them. It is certainly easier now to believe the stories of runaway inflation in European countries after World War I. Central to the stories was the reduced reliance on a country’s currency to establish the terms of exchange – you can buy a certain amount of oranges for a certain amount of Deutsche marks. To do that, you have to have a basic trust in the value of the currency you are using. You expect The currency you use not to fluctuate wildly.

In those times of hyperinflation, currency values were subject to rapid change and there was great pressure to use the currency before it lost more value. The rapid changes inevitably moved markets to become chaotic. Making them orderly, once again, was no easy task. Similarly now, it will not be easy to rein in inflation once it becomes established.

Author and educator Dave Kaplan writes from his home in Santa Barbara, Calif.

(3) comments

David Collins

Too many cheap dollars chasing too few expensive goods will do it every time .

(Edited by staff.)

noitall

The modifier "often drives" makes this entire piece disingenuous. The Federal Reserve drives inflation. Control of inflation is their mandate. Consumers have very little input. I know my spending habits have no effect.Mr Kaplan is adrift in the conservative sea of ifs and buts.

mpjeep

Congress mandates the Federal Reserve to control inflation. The Fed's goal is to keep inflation around 2 percent.

I reached out to Senator Tillis on November 9th and asked why we are having hyperinflation if Congress has a mandate in place. No response as of yet.

Welcome to the discussion.

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