Under what situation the government will be no longer able to control the inflation rate?

The government has fiscal tools and monetary tools to control the domestic inflation rate; however, sometimes it may not be able to use such tools to influence the domestic inflation. Inflation implies the currency is being devalued. As a currency is backed by its government, when its government’s credit is questioned by the international market or large financial institutions, the value of the currency will also be badly damaged.

Inflation also means the currency is devalued against goods and services. When there is a shortage in the supply side, the currency will be oversupplied to the market, when the equilibrium of the demand and supply for money changes, the values will change, and the currency is devalued and there is an inflation in the economy. Therefore, when an economy lacks sufficient supply and production of goods and services, the government cannot control the value of its currency.

In addition, the inflation can get out of the government’s hands especially nowadays because of the economy’s trade with other countries. Countries are trading with each other and countries do not need to produce everything by themselves now. However, once one country has an important resource that it has to depend on imports but the supply from imports decreases for some reason (natural disaster caused decrease in production in other countries, political reason such as sanctions), the currency will depreciate in the forex market, and as it is an important resource for the domestic economy, the prices of goods and services that relate to this resource in the domestic markets will increase sharply and lead to inflation.

These are the several situations where the government lacks of tools to lower the inflation, and all these reasons tight relate to one important reason that the economy does not have the ability to generate sufficient production.