Inflation: Causes and Cures
by Don Chambers
From a consumer’s perspective, inflation is rising prices. From an economist’s perspective inflation is better viewed as when the value money declines. These perspectives provide difference inferences as to the causes and cures of inflation.
In the first view inflation is blamed on producers for raising the prices of their goods (especially oil) and blamed on laborers for demanding higher wages. This is the view that President Nixon embraced when he imposed Federally-mandated price and wage freezes on the US economy in 1970. I remember well President Ford’s ridiculous strategy of having citizens wear “WIN” buttons (whip inflation now) to keep prices stable. The perspective that corporations and unions cause inflation led to failed government policies. The ensuing decade saw rampant inflation – reaching an annual rate of almost 15% by 1979.
A currency has a price – or value – just like any other asset. And just like any other asset, the price of money is based on supply and demand. The demand for money is based on economic activity and expectations. The supply of money is determined by the central bank (the Federal Reserve in the US). It is the central bank that controls inflation rates, not unions or corporations.
In October 1979 the Fed finally decided to stop blaming corporations and unions for inflation and began to “look into the mirror” to find the culprit. The Fed took action to stabilize the supply of money and in so doing sent the economy into a deep but necessary recession. That policy ultimately paid huge dividends as the economy flourished starting in 1982.
The Fed has caused all past inflation problems and appears serious about not making the same mistake again. The Fed’s tough actions may cause pain in the short run, but if executed well it will serve the economy in the long-run by providing what every economy needs: a currency with a stable value.