In 2022, almost all countries around the world suffered from a significant increase in
prices due to the pandemic and other factors. For instance, the U.S. inflation rate was
approximately 9%. Moreover, in Kazakhstan that year, the inflation rate was almost
20%. If that level of inflation stayed the same, after five years, one dollar would be
worth two dollars, and one kilogram could cost as much as 500 grams today. This
shows how dramatically prices can rise each year.
Maybe you wanted to know what inflation actually is, and after searching through
some videos or papers, you probably came across one important phrase: “a little
inflation,” in other words, target inflation. Almost every country in the world is trying
to keep inflation at a low percentage, around 2–3%. Jerome Powell, the Chair of the
Board of Governors of the Federal Reserve System said: “Near-term measures of
inflation expectations have moved up, on balance, over the course of this year on news
about tariffs. Beyond the next year or so, however, most measures of longer-term
expectations remain consistent with our 2 percent inflation goal.”
Other countries, like Japan, Germany, and many more, also try to maintain this small
percentage. But here is where the confusion begins: if inflation is increasing and can
lead to crises, why don’t countries just try to eliminate it completely? It can be
frustrating to see how the price of your favorite drink, for example, increases every
year. So you may ask an important question: “Why can’t we make inflation zero, or
even better, negative? If higher prices reduce consumers’ purchasing power and wages
do not keep up with the level of expenses, why can’t prices just stay the same?”
The quick answer is: no, we cannot, because it would make the economy even worse
than just rising inflation. We will dive into that part later. Now, we should cover what
inflation is and how it works. Inflation is the general rise in the prices of goods and
services over time, which decreases the value of currency.
The inflation cycle can be explained like this: first, wages increase because companies
make more profit. Higher wages push consumers and households to buy and spend
more, which increases demand. This higher demand leads to rising prices. As prices
and company incomes grow, businesses are encouraged to produce more and hire
more people. More jobs lead to higher wages, which again makes people spend more.
Looking at this explanation, you can probably see that inflation can be a good thing:
when wages and prices are both rising and the unemployment rate is decreasing every
year. But in reality, it is not always what people have planned. Businesses and companies can face increasing costs, or the prices for supplies go up, making production more expensive. Then, the government steps in. They might increase interest rates, for instance, to help stabilize the economy. Increasing interest rates actually means that borrowing, spending, hiring, and all types of investment become more expensive, which can slow down the economy and, in turn, inflation. This helps stabilize inflation, and this is what the U.S. and other countries did during 2022 and 2023. This period was also influenced by other major events, including the effects of COVID-19.
But to stabilize inflation, the government cannot keep increasing interest rates forever.
Inflation can fall too much and even turn negative. It might seem great at first when
inflation becomes negative and prices start falling, but it is actually worse than high
inflation. This is called deflation. When borrowing becomes expensive, people take
less money, buy less, and production slows down. Companies start lowering prices
and reducing output, while customers, expecting prices to fall even further, save for
later their purchases. This slows production even more, and the economy falls deeper.
Businesses reduce production, lower prices, and lay off employees, increasing
unemployment.
Deflation is a difficult situation for an economy, and governments do everything they
can to avoid it. They can lower interest rates, offering people the opportunity to
borrow, hire, and buy more cheaply, which pushes people to spend their money in the
economy. Therefore, companies are encouraged to produce more, increase prices, hire
employees, and actually raise inflation back to normal levels.
Deflation is a hard condition for both governments and ordinary citizens. History
shows that escaping from deflation is much harder than it seems. We can see it in the
1929 Great Depression, the 2008 mortgage crisis in the U.S., and during the 1990s and
2000s in Japan. Hence, governments, fearing negative inflation, try to keep it under
control, even at small positive percentages, which is why target inflation exists. We
can see this in the history of 2020, when inflation was going down and started
approaching negative levels. Governments lowered their interest rates to almost zero
(0.05%), accepting that in the long term inflation would rise again.
So now you can see why countries try to keep prices rising, even at the lowest
possible rate. High inflation, above 9%, negatively affects the economy, but negative
inflation is much worse, and history proves it, even though it is rare. Calculating
exactly why prices are rising is difficult, because it involves many macroeconomic
factors. But the main idea is this: if inflation gets too close to zero, it becomes
unstable and risky. So, can prices actually stop rising? Can inflation stop increasing
and prevent crises from taking away jobs? Unfortunately, the answer is no, and that is
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