9.4.6—Inflation policies

Demand-pull inflation can be restrained by contractionary fiscal or monetary policy; cost-push inflation may require supply-side action, targeted support or acceptance of a temporary price rise.

Policies work through different lags and side effects. Higher rates can reduce demand but increase debt-service costs; taxes can reduce spending but affect incentives; supply improvements take time and may not lower prices immediately.

If inflation follows an overheated demand boom, rate rises may be appropriate. If it follows a one-off energy shock, aggressive demand reduction may cut output while leaving the initial energy price unchanged.

No anti-inflation policy is costless or guaranteed, and a lower inflation rate is not the same as falling prices.