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The review and analysis of inflation and its effects : will current high inflation lead to an economic crisis?

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Chen, Yueyun (Bill)


June 2022



Issue No.





The US and world have experienced soaring inflation for many months. What caused such excessive inflation and how should it be managed? Will current high inflation destroy the US and world economies and lead to a great depression? This paper provides the comprehensive review and analysis of inflation and its effects to answer these questions. Economic and finance theories are applied to explain how the equilibrium prices of products and services are determined and then changed to lead to inflation or deflation and why the currency exchange rate must be adjusted when an economy's relevant inflation rate is changed. The paper theoretically and empirically discusses the relationship of inflation with economic growth, unemployment, international trade, interest rates, and exchange rates, and explores the effects of inflation on individuals and investments. In addition, it examines whether government inflation targeting has been effective. The paper uses the latest US and world data in the analysis to support the relevant conclusions; the correlations of some variables from the US are calculated and significance tests are conducted. The paper projects that there may be a minor economic recession if the current high inflation lasts extensively but the US and world can avoid an economic crisis if take strong and effective actions to control and reduce the present high inflation. More importantly, it is essential that the world learns and knows how to prevent and avoid the next high inflation cycle. Particularly, the world should aim at reforming the existing economic and financial systems to be more inclusive and sustainable, solving the rising income and wealth inequality problem and better developing and using the new technologies that can benefit all more equally, improve environment, further enhance efficiency and continuously raise productivity.

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