While excessive inflation, sometimes called hyperinflation, hasn’t been a problem in the U.S., even a more modest inflationary spiral works against economic growth and financial stability. For example, the last period of soaring inflation, in the late 1970s and early 1980s, was the prelude to the recession of 1981-1982, a downturn whose affects lingered for most of the decade.
By contrast, the stable prices that are characteristic of controlled inflation bolster confidence in the value of the dollar and encourage productive investment decisions. In the 1990s, for example, inflation fell to 2%, the dollar rose, and business investment spending accelerated.
Stable prices by themselves can’t prevent the recurrent periods of growth and decline that are typical of the normal business cycle. But they do help moderate the expansions and cushion the downturns.
Anthony Santomero,
Federal Reserve
Bank of Philadelphia
Anthony Santomero of the Federal Reserve Bank of Philadelphia describes the long road to recovery following an inflationary spiral.
Once an inflationary spiral starts, ending it is painful and difficult. It takes a strong dose of tight money and high interest rates. Such drastic action will likely cause the economy to contract and fall into recession. Eventually the economy finds its balance again. But not before a prolonged period of turmoil. While weathering an economic downturn, people will be borrowing at high interest rates to pay inflated prices.
By contrast, the stable prices that are characteristic of controlled inflation bolster confidence in the value of the dollar and encourage productive investment decisions. In the 1990s, for example, inflation fell to 2%, the dollar rose, and business investment spending accelerated.
Anthony Santomero, 