When the demand for goods and services exceeds supply, higher prices result. This is referred to as ‘demand-pull inflation’. There are a number of factors that can contribute to an increase in demand. This writing is intended to focus on government actions that affect the amount of money available thus increasing or decreasing demand:
- Government Spending – When there is an increase in government spending it can result in prices going up. The amount and extent of the government spending will influence the amount of the price increase and thus the rate of inflation.
- The Treasury Department – The government issues currency through central banks and the treasury department. Banking regulators affect money supply by imposing requirements on banks to hold reserves, offering credit and other money availability issues. In short, the treasury increases or reduces the money supply available through regulation.
- The Federal Reserve Board – Commonly referred to as ‘The Fed’ is a panel that is responsible for providing a safe and reliable financial system The Federal Reserve Board holds eight scheduled meetings a year. The most significant action they take at these meetings is to determine the Federal Funds Rate. This is the interest rate that commercial banks charge. This rate in turn determines the interest rate charged for consumer loans. Changes in interest rates will increase or reduce the money supply.