Policies to Control Inflation

Policies to Control Inflation

Coast-Push Inflation

  • If a government believes that inflation is caused by excessive wage rises, then it may seek to implement measures which halt wage rises
    • In the public sector, it can simply do this by decreasing the amount of government spending allocated to public workers’ pay.
    • For the private sector, the government can implement policies that directly relate to wage increases
      • However, this can create inflexibility in the labour market, as new companies cannot attract workers with higher wages.
    • A government may also reduce corporation tax or subsidise firms
      • This not only stimulates investment, but also means firms can cover rising costs without putting their prices up.
      • However, it could also mean that firms get reliant upon the subsidies, and do not strive to keep their costs down.

Demand-Pull Inflation

  • To reduce demand-pull inflation, a government may use deflationary fiscal and/or monetary policy
  • These measures will reduce aggregate demand, and hence the price level
    • A government could achieve this by raising income tax, which would reduce people’s ability to spend
    • AD could also be reduced by raising the interest rate, as this will reduce consumption, investment and net exports.

Inflation Targeting

  • Inflation targeting can lower the chance of both demand-pull and cost-push inflation by reducing the expectations of inflation
  • Inflation is caused by how people act, and so if people have confidence that the central bank can meet their target of inflation, they will act in a way that does not cause inflation


  • In the long run, a government would seek to reduce inflationary pressure by increasing aggregate supply
    • If AD increases – a move that would normally increase the price level – but AS increase in line with it, then the price level will remain unchanged
      • This results in the fact that consumers would be able to enjoy more goods and services without inflation and/or balance of payments problems
    • This increase of AS is likely to be the result of successful supply-side policies, as they’re more of a long-run approach to controlling inflationary pressure.
      • Long-run SSP do not have adverse short-term effects on employment and output that deflationary fiscal and monetary policies may.