The Banking Executive Magazine - July 2022 Issue

Back to Basics always into the hands of specific in- dividuals or business firms, and the process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy. CONTROLLING INFLATION A country financial regulator is the important entity responsible for con- trolling inflation. Inflation control is undertaken by implementing mone- tary policy measures. These refers to the actions of a central bank or other committees that determine the size and rate of growth of the money sup- ply. In the United States, the Federal Re- serve (United States central bank) monetary policy goals include mod- erate long-term interest rates, price stability, and maximum employment, and each of these goals is intended to promote a stable financial envi- ronment. The Federal Reserve clearly communicates long-term inflation goals in order to keep a steady long- term rate of inflation, which is thought to be beneficial to the econ- omy. Price stability, or a relatively constant level of inflation, allows businesses to plan for the future since they know what to expect. Central banks role is to set monetary policies that can pro- mote maximum employment and maintain price stability. HEDGING AGAINST INFLATION Stocks are considered to be the best hedge against inflation, as the rise in stock prices is inclusive of the effects of inflation. Special financial instruments exist that one can use to safeguard invest- ments against inflation. They include Treasury Inflation-Protected Securi- ties (TIPS), low-risk treasury security that is indexed to inflation where the principal amount invested is in- creased by the percentage of infla- tion. IMPACT ON THE POOR High or unpredictable inflation that is not outmatched by wage gains can be especially hard for poor people. Poor households spend a bigger chunk of their budgets on necessities such as food, housing and especially gas, which is often a contributor to bouts of high inflation. They spend less on discretionary expenditures. If rich households face high inflation and their wages do not keep up, they may have to cut back on vacations or dining out. A poor family may be forced to cut back on essentials, like food. RELATION BETWEEN INFLATION AND RECESSION Experts do not anticipate a recession in 2022, but they recommend in- vestors to position their portfolios de- ISSUE 163 JULY 2022 the BANKING EXECUTIVE 43