So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment.
Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy.
So 2-3% is really the sweet spot.
It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt.
Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy.
So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates.
The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone.
So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.
So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment.
Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy.
So 2-3% is really the sweet spot.
It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt.
Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy.
So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates.
The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone.
So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.