<p>On the contrary, inflation can be self-reinforcing. If you think that your money is constantly losing value, than you are incentivized to spend as much of it as soon as possible to avoid the loss in value. This further exacerbates inflation.</p>
<p>Suppose a PS5 costs 500 USD today. With inflation, e.g. 10%, I expect it to cost more tomorrow, e.g. 550 USD. In and of itself, this incentivizes me to buy today instead of waiting to buy tomorrow, because it will cost more tomorrow.</p>
<p>Similarly, deflation is also self-reinforcing, which makes it hard to get out of (see Japan example in the past). If prices keep falling, then I will wait as long as possible to spend money, to benefit from lower prices as much as possible. The decreased spending results in even lower prices.</p>
<p>Also note that the &quot;increase interest rate&quot; in your logical chain is a <em><strong>policy response</strong></em> to reduce inflation. It is not a natural outcome of inflation itself. Note, what matters is the real interest rate (which is independent of inflation)</p>

CC BY-SA 4.0
2023-02-28T22:14:35.247Z
2023-02-28T22:14:35.247Z
BB King
<p>In the short run, wouldn’t you expect that an increase in (the rate of?) inflation leads to a decrease in GDP and thus inflation decreasing again. Like a self-correcting mechanism.</p>
<p>My motivation comes from the following:</p>
<p>Increase inflation &gt; increase nominal production/income &gt; increase demand money &gt; increase interest rate &gt; decrease demand money &gt; decrease demand</p>
<p>I know investment needs to equal savings so I’m confused here too…</p>

CC BY-SA 4.0
2023-02-27T08:33:06.700Z
did you meant to ask in a long run? In a short run there is no reason for anything to self correct due to rigidities
1muflon1
<macroeconomics><gdp><money>
Why inflation doesn’t cool down economy by itself?
Rudi
# Why inflation doesn’t cool down economy by itself?

(Asked by: username_0 on 2023-02-26)

In the short run, wouldn’t you expect that an increase in (the rate of?) inflation leads to a decrease in GDP and thus inflation decreasing again. Like a self-correcting mechanism.

My motivation comes from the following:

Increase inflation > increase nominal production/income > increase demand money > increase interest rate > decrease demand money > decrease demand

I know investment needs to equal savings so I’m confused here too…

**Tags:** macroeconomics, gdp, money

> **Comments:**
> **username_1**: did you meant to ask in a long run? In a short run there is no reason for anything to self correct due to rigidities  

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## 1 answers

### Answer by username_2 on 2023-02-28. Score: 2

On the contrary, inflation can be self-reinforcing. If you think that your money is constantly losing value, than you are incentivized to spend as much of it as soon as possible to avoid the loss in value. This further exacerbates inflation.

Suppose a PS5 costs 500 USD today. With inflation, e.g. 10%, I expect it to cost more tomorrow, e.g. 550 USD. In and of itself, this incentivizes me to buy today instead of waiting to buy tomorrow, because it will cost more tomorrow.

Similarly, deflation is also self-reinforcing, which makes it hard to get out of (see Japan example in the past). If prices keep falling, then I will wait as long as possible to spend money, to benefit from lower prices as much as possible. The decreased spending results in even lower prices.

Also note that the "increase interest rate" in your logical chain is a ***policy response*** to reduce inflation. It is not a natural outcome of inflation itself. Note, what matters is the real interest rate (which is independent of inflation)


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