New Age History and Economics

The Day We See The Truth And Cease To Speak it, Is The Day We Begin To Die. MLK Jr.

Sunday, May 20, 2012

How to control Inflation

How can we control Inflation? 

There are several measures that can be taken to effectively control inflation before it gets out of hand. Given that inflation is a result of cost push or demand pull functions in economy and imbalance between supply and demand of goods and services at current prices, so measures be taken to reduce costs and demand and increase supply of goods and services. Following measures in this regard are suggested;-

THE SUPPLY SIDE;
  
a) Increased Production;
The supply of goods and services can be increased by increasing Industrial and Agricultural production. Agricultural production can be increased by providing an adequate supply of agricultural inputs at low prices, modernization of agricultural, scientific farm management, adequate water supply for irrigation etc. Similarly Industrial production can be increased by giving incentives for increased production, foreign direct investment, credit growth fiscal concession etc.


b) Reducing costs of Production;

Reducing cost of debt; - decreased interest rates on Industrial and Agricultural loans.

Reducing labor cost; - Reducing minimum wage thus inviting more entrepreneurs into production.

Reducing price of raw materials; -, Lots of raw material is supplied by or is under control of Government or Politicians like mining products or by freeing imports from duties and tariffs.

Reducing prices of Gas, Energy, transportation etc will lead to lower costs of production and supply there nullifying cost push inflation. 

 c) Control of Illegal Activities;

There are some illegal activities that cause significant inflation in economy. It is hoarding, smuggling, profiteering, black marketing etc. In the case of smuggling of large staples of sugar, butter, wheat rice etc are exported illegally in order to obtain higher prices. Similarly the shortage in most cases are artificially created to increase profits. All such activities must be controlled through advertisements, giving rewards to informants, and punishments to offenders.

d) Price and Security;

Production and distribution of goods can be affected due to existence of unease and insecurity or disorder in society. In such circumstances, investors are hesitant to invest for fear of potential loss. Similarly, the production of Industrial products is affected due to several unpleasant events such as strikes, public disorder, rallies riots etc. Therefore peace and security must be ensured to maintain regular supply of goods and services.

e) Maintain Energy Resources;

The supply of agricultural and industrial products is highly dependent on energy availability. If the energy availability is irregular or expensive it will adversely affect supply and its costs and will become expensive. Increased costs causes inflation. Therefore all necessary measures be taken to provide regular supply of major sources of energy to agricultural and industrial sector at constant costs.


THE DEMAND SIDE;

a) Control of Money Supply;

The money supply has great influence on rising inflation that is, money supply increases demand and thereby increases inflation and vise verse. Therefore to control inflation, measures must be taken to control money supply. The money supply can be controlled with the help of Monetary policy in which Central Bank of a Country uses various methods, such as Bank Rate policy, open market operations, changing reserve requirements, credit rationing, direct market intervention etc. All these methods are useful to control inflation in a country.

b) There is no deficit Financing;

Deficit financing shows that public is spending beyond their income. To some extent it will lead to development but it will also lead to inflation. Deficit financing is used to finance additional costs of budget deficit. This leads to increased money supply in economy. Therefore deficit financing should be discouraged and all developmental financing should be met through taxes and debt sale.


c) Population control;

In most developing countries, the population is increasing very quickly, whereas production of goods and services is not increasing at same pace. This leads to imbalance between demand and supply of goods and services which leads to inflation. Therefore, to control inflation, appropriate measures should be taken to control the population.
 
d) Fiscal Policy;

Fiscal policy refers to Government policy of public spending and taxes. The main objective of Fiscal policy is to maintain only a slight change in the general price level. During inflation, the government tries to reduce its expenditure on unproductive activities and the direct tax rate increases so that the purchasing power of the population is reduced. Due to reduction in the purchasing power of the population, demand of goods and services will be reduced leading to controlled Inflation.


e) Direct Measures;

There are several other options available to the government to control inflation and wage and price freeze, rationing of goods, establishments of public service shops, price review / stabilization committees. These several measures are often used by Governments to control inflation.

Kaps


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