Is it possible to stop inflation

Post-World War I Europe offers case studies of countries that abruptly halted enormous inflation rates at virtually no cost to output because government policies firmly set expectations. Other studies have shown that a number of emerging economies even experienced economic booms while trying to squelch high inflation. So, which perspective is correct? According to Henry, an associate professor of economics, neither view asks the most important question: Do the long-term benefits of reducing inflation outweigh the short-term costs?

Economists have been so focused on measuring the costs that they have not asked whether the gain that results from lower inflation justifies the pain required to reduce it.

Henry uses the stock market to gauge the net effects. In a well-functioning and rational stock market, he points out, changes in stock prices reflect revised expectations about both future corporate profits and interest rates. Measures taken to stabilize inflation may raise interest rates and reduce profits in the short run-which is bad for the stock market. However, the reduction in inflation may increase future profits and reduce interest rates - which is good for the market.

Therefore, the stock market response to the announcement of a policy directed at reducing inflation measures whether the good effects of reducing inflation outweigh the bad. Henry constructed a database of 81 different episodes of inflation in 21 emerging economies, such as Chile, Argentina, Indonesia, and Mexico, over a year period ending in He identified 25 episodes where inflation was greater than 40 percent.

The median inflation rate among those episodes was percent. In the moderate group of inflation episodes he examined, the median rate was 15 percent. Henry found that when countries tried to stabilize high inflation, the stock market increased by 24 percent on average. In other words, reducing high inflation has a large positive effect on the stock market.

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These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Governments can use wage and price controls to fight inflation, but that can cause recession and job losses. Governments can also employ a contractionary monetary policy to fight inflation by reducing the money supply within an economy via decreased bond prices and increased interest rates.

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Monetary Policy: Pros and Cons. Treasury yields, particularly at the longer maturities, have surged to pre-pandemic levels. That action in turn has raised the question of whether the Fed again could become a victim of its own forecasting errors. The Jerome Powell-led Fed already has had to backtrack twice on sweeping proclamations about long-term policy intentions.

In late, Powell's statements that the Fed would continue raising rates and shrinking its balance sheet with no end in sight was met with a history-making Christmas Eve stock market selloff.

In late , Powell said the Fed was done cutting rates for the foreseeable future, only to have to backtrack a few months later when the Covid crisis hit. Krosby compared the Powell Fed to the Alan Greenspan version.

Greenspan steered the U. Powell "is telling you there's no timeline. The market is telling you it does not believe it. To be sure, the market has been through what Krosby described as "squalls" before. Bond investors can be fickle, and if they sense rates rising, they'll sell first and ask questions later. Michael Hartnett, the chief market strategist at Bank of America, pointed to multiple other bond market jolts through the decades, with only the episode in the weeks before the Oct. He doesn't expect the selling to have a major impact either, though he cautions that things could change when the Fed finally does pivot.

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