DEFINITION of 'Overheated Economy'
When a prolonged period of good economic growth and activity causes high levels of inflation (from increased consumer wealth) and inefficient supply allocations as producers overproduce and create excess production capacity in an attempt to capitalize on the high levels of wealth. Unfortunately, these inefficiencies and inflation will eventually hinder the economy's growth and cause a recession.
BREAKING DOWN 'Overheated Economy'
Rising rates of inflation are typically one of the first signs that an economy is overheating. As a result, governments and central banks will usually raise interest rates in an attempt to lower the amount of spending and borrowing.
Between June 2004 and June 2006, the Federal Reserve Board increased the interest rate 17 times as a gradual means of slowing America's overheated economy.