how does a country control/fix inflation?
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A macroeconomic system is very complex, but in very rough eli5 terms…
If the economy is stable, the government can have some influence in the inflation by manipulating for example, the federal funds rate (how much interest they’ll pay if you lend them money – which propagates to how much banks will pay as interest too). If interest rates are higher, more money goes to savings and less into circulation, people spend less, lowering demand for goods, prices go lower, less inflation. With lower interest rates, people save less, spend more, there’s more demand, prices go higher, more inflation.
Now, a crumbling economy with runaway inflation is a harder to control beast. I’ve been through one, in Brazil, the 80s-90s were crazy times. It peaked 80% in a month in 1990, going beyond 1500% a year.
Several plans to curb it falied, mostly because we already had an inflation “culture”: Everyone would keep marking up prices because they “knew” tomorrow’s money would value less. You could buy cheaper by reaching to products at the back of shelves, or simply peeling off some layers of price stickers (no barcodes then). Supermarket employees worked all day with sticker pistols, but didn’t manage to relabel everything. You would hear them coming, and grabbed the merchandise before they got to it. You had to buy all supplies for the month as soon as you got your sallary, as waiting for some days would mean you could buy less. We cut 6 zeroes from currency, or more. At some point I made 25,000,000.00 monetary units a month (don’t even recall what was the currency then).
Sooo in 1994 a magic trick was done by a Economy Minister (who later became president for two terms). A “parallel currency” was established. There was no legal tender, but it was a reference value, like if it was a foreign currency.
It was the URV (real value unit), and there was an “exchange rate” to out currency. The URV was rather stable, and a lot of things started having prices, fees, payments, etc, adjusted in relation to that (in other words, they would keep the same value in URV, but converted into the “normal” currency when you were to pay them). So the inflation culture was satisfied, as prices kept growing in our currency, but people now had a reference to adjust them – the URV. Then more and more things had their prices adjusted by the URV.
So after a while everyone learned to trust the URV as a “real value”, no matter what was the crazy conversion to our currency at the moment. Then at this point the government said: “Right, now forget the old currency, our new currency is the Real, and it’s exchange rate to URV is 1:1”.
Pure genius. Inflation obviously dropped immediately, as prices in Real were stable. We do have inflation now, but hyperinflation like in the 80s-90s never came back.
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