Inflation is characterized by rising prices. It occurs when economy develops due to increased spending. Money loses value because it can’t buy as much as before. If inflation exceeds a moderate rate, it can result in devastating situations for an economy. Therefore, governments should be controlled it. The following are some economic policies that are used to reduce inflation.
In many countries, monetary policy is one of the most important tools for controlling inflation. The governments try and predict future inflation. They look at many economic statistics that help them know if the economy is overheating. If they predict that inflation will increase above a given target, they increase interest rates.
Supply Side Policies
The aim of supply side policies is to increase productivity and competitiveness. For instance, it was anticipated that deregulation and privatization would make companies more competitive and productive. After a long term, supply side policies can help to reduce inflation. However, those policies cannot be used to control a sudden increase in the rate of inflation.
Wage growth is a primary factor in determining inflation. Fast increase of wages causes high inflation. Therefore, some governments limit wage growth to reduce inflation.