occurs when spending on goods and services outstrips production. Prices can rise because of supply constraints that increase the cost of producing goods and offering services, or because consumers, enjoying the benefits of a booming economy, spend their excess cash faster than producers can increase production. Inflation is often the result of some combination of these two scenarios.

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occurs when spending on goods and services outstrips production. Prices can rise because of supply constraints that increase the cost of producing goods and offering services, or because consumers, enjoying the benefits of a booming economy, spend their excess cash faster than producers can increase production. Inflation is often the result of some combination of these two scenarios.

Governments generally try to keep inflation within an optimal range that promotes growth without dramatically reducing the purchasing power of the currency. In the U.S., much of the responsibility for controlling inflation falls on the Federal Open Market Committee (FOMC), a Federal Reserve committee that sets monetary policy to achieve the Fed’s goals of stable prices and maximum employment.1

There are many methods used to control inflation and, while none are sure bets, some have been more effective and inflicted less collateral damage. The Government can use this method to control inflation.

• Governments can use wage and price controls to fight inflation.
• These policies faired poorly in the past, leading governments to look elsewhere to control the economy.
• Governments may pursue a contractionary monetary policy, reducing the money supply within an economy.
• The U.S. Federal Reserve implements contractionary monetary policy through higher interest rates and open market operations.
• The Fed used reserve requirements to manage the nation’s money supply but dropped these limits until further notice.