Inflation is a really tricky thing to understand because so many variables have to go into making a currency rise in value.
But to curb inflation, it is best to invest in tangible assets (natural resources, exportable goods, etc.) However, this doesn’t always work. As we know, natural resources are finite, and once a country runs out of resources in a certain location, it costs more capital to pack up and go looking for more.
Rather, modern economies tend to rely on more advanced tactics such as quantitative easing (adding more currency to an economy) pegging a currency (keeping a currency fixed to another currency) or investing in US Treasury bonds and securities are all functions that a country’s central bank and/or government may implement in order to keep inflation under control.
To understand this better we need to know what causes inflation. An economy can either have too much demand of something, or too much supply, either way, inflation will arise. That is why every economic system aims for equilibrium prices and quantities.
One popular method of controlling inflation is the Central Bank’s overnight rate. The Bank of Canada aims to keep their overnight interest rates at 1 to 3 percent and has successfully done so for quite some time now. The 1 to 3 percent rule is shared by many developed economies and is one that creates a sound guideline for financial stability.
For the sake of this argument, I am going to use the hyperinflation issue in Venezuela as an example.In this instance, a surplus of supply, as well as a weak monetary policy and currency, led to massive inflation in Venezuela (as much as 808%)
This is partly due to the socialist structure of the country, which aims to give a certain amount of money to everyone. However, this political structure does not work because people will have no incentive to work harder given that there is a cap to their success.
In Venezuela’s case, they are trying to curb the inflation of their currency, the Bolivar, by completely discontinuing the 100Bolivar currency ($10 US Value) which just so happens to be their most-used currency. By taking out an underperforming currency value, Venezuela is attempting to curb their inflation issue by means of monetary policy. Why? Because it has recently become unprofitable for the country to export oil due to lower oil prices on the world market.
Ideally, to stop or slow down inflation, you want to invest in tangible assets that are highly unlikely to crash in value (gold, minerals, metals, etc.) however, in the case that this doesn’t work, you will have to implement a monetary policy such as devaluing a currency altogether.
