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What Is Inflationary Psychology?

Alex Newth
Alex Newth

Inflationary psychology is what occurs in people’s minds when inflation happens, and it often makes problems worse, even though those affected by it think they are helping the problem. During times of inflation, the price of goods tends to increase because of the status of the area’s money. Prices are rising, so people worry about not having enough money and take out loans to ensure they have more money ready to afford common living expenses. With more money circulated, the inflationary psychology actually makes the problems worse, and prices increase even more. This normally only gets better when deflation causes prices to drop.

Most countries and regions experience a financial state called inflation at some point. This is when there is a lot of money circulated and, because the money is weaker, prices tend to rise. With prices rising, inflationary psychology tends to take over in many people. Even those aware of this mental state may be affected by it, depending on their current financial situation.

Man climbing a rope
Man climbing a rope

When prices increase, people may feel pressured about their finances, because they may be worried about prices continuously going up. To correct this, and to ensure they have enough money for basic expenses, these people borrow money from the bank. During times when inflationary psychology takes over, borrowing tends to be at its highest point, and some banks may even run out of money to loan customers.

People who have borrowed money have more money and, thus, usually feel more secure about their finances and ready to combat the increasing prices. All the increased borrowing causes people’s fears to become true at this point: the prices will continue to go higher. When inflation occurs, it only gets worse when more money is circulated and, because there is so much borrowing, there is a lot of distributed money. As a result, the prices will get higher and the inflationary psychology just serves to make problems worse.

As inflation gets higher, inflationary psychology normally will only get worse and cause more borrowing, which further increases the amount of circulated money. The only real cure for this mental state is deflation, which often occurs through governmental actions, banks attempting to fix the problems and businesses persevering through the inflation. Most of the damage caused by this mental state occurs early in the inflation’s upswing but, because prices may continue to go up, people normally will still feel pressured to have more money.

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