Why Do Central Bankers Fear Inflation?
Investigating How Inflation Shapes Policymakers’ Decisions
Inflation and economic growth are the two most important macroeconomic variables. Together they drive monetary policy, fiscal policy, and aggregate wealth. And shocks to either variable can have a massive impact on our financial lives.
In this series of essays, I hope to further explore why inflation matters and how it impacts us.
High Inflation Is Not Hyperinflation
Let’s get this out of the way — high inflation is not the same thing as hyperinflation.
Hyperinflation is the worst and it can easily impoverish nations, wreck governments, and create widespread anarchy. However, hyperinflation is generally limited to countries that owe big debts which are denominated in the currencies of other countries.
It occurs when these countries experience an economic shock and desperately try to print their way out of that debt — for example, post World War I Germany, which owed a massive debt (denominated in gold and foreign currencies) to the victorious Allies, attempted to repay it by printing German Marks in order to buy gold and foreign currencies. This created a flood of German Marks, crashed the value of the Mark, and threw an entire…
