Inflation – types, causes and control
Inflation refers to a persistent or sustained rise in the general price level of goods and services or in an economy.
During an inflationary period, there is too much money in circulation, and too much money chases fewer goods and services .The value of money, therefore, falls during inflation. A period of rising prices deliberately caused by government is known as REINFLATION.
When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation.
TYPES OF INFLATION
- Demand-Pull inflation: This occurs when the demand for goods and services is greater than their supply caused mainly by increase in worker’s salaries and wages or population explosion. Demand–pull inflation is associated with periods of trade boom.
- Cost-Push inflation: Cost-push inflation occurs when increase in cost of production are passed onto consumers in the form of high prices for the goods and services on sale. The price of goods and services are pushed up rising cost.
- Hyper–inflation: Hyper-inflation, also known as galloping or run-away inflation occurs when a persistent inflation becomes uncontrollable and the value of money keeps declining rapidly. War, budget deficits, etc. are the major causes of high-inflation.
- Persistent or creeping institution: Persistent or creeping inflation, also known as chronic inflation, occurs when there is a slow but steady rise in the volume of purchasing power and a fall in supply of goods and services.
In other word, creeping inflation involves a slow but steady rise in the general price of goods and services.
CAUSES OF INFLATION
- Increase in demand: When the demand for goods and services is greater than supply, this result in inflation (demand– pull inflation).
- Low production: Low production of goods and services can lead to the scarcity and when supply cannot meet up with high demand, inflation set in.
- War: War is a major cause of inflation as people no longer produce, resulting in high volume of money pursuing fewer goods.
- Increase in Salaries and wages: When salaries and wages are increased without corresponding increase in supply of goods and services, it can lead to excess money in circulation chasing few goods.
- Hoarding: Hoarding which is the act of creating artificial security of goods can lead to inflation.
- Excessive bank lending
- Poor storage facilities
- Population increase
- Higher cost of production
- Reduction of imports
EFFECTS OF INFLATION
Inflation has both desirable and undesirable effects:
- It leads to increase earning and higher profits on the part of businessmen (Positive)
- Inflation discourage saving, thereby leading to low capital formation (Negative).
- Fall in standard of living (Negative)
- Fixed income earners will suffer (Negative)
- Creditors will loss (Negative)
- Debtors will gain (Positive)
- Reduction in the value of money (Negative)
HOW TO CONTROL INFLATION
- Use of contractionary monetary measures: The use of contractionary monetary measures such as increase in bank rate, Open market operation (OMO), deposit ratio and moral persuasion, can help to control inflation.
- Use of fiscal measure: inflation can also be controlled with the use of fiscal measures to reduce the amount of money in circulation, e.g. increase in direct taxation.
- Reduction in government expenditure or surplus budget
- Industrialisation: Industrialisation will reduce over reliance on imported goods and bring about increase in output which will reduce prices.
- Increase production
- Checking the activities of hoarders
- Discouragement of importation.
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