Inflationary Psychology

Inflationary psychology is kind of like a run on the banks, but instead of taking money out of the bank in a hurry, it’s spending money in a hurry for fear of inflation.

As people are worried a currency will erode due to inflation, they spend more. If this is done en masse, then inflationary psychology is a self-fulfilling prophecy: as everyone spends, there’s more money circulating in the system, which increases inflation, as well as continuing inflationary psychology.

This is one of those could-possibly-spiral out-of-control feedback loops, and the Federal Reserve (and other central banks) know this. To keep inflation from going crazy, the Fed may raise interest rates to rein in that temptation to spend now. Hold your horses, folks.