What is Inflation?
Inflation can be defined as “Too much of money chasing behind few goods”. In other word there is more money in the hand of people but less goods to be bought resulting in rise in prices of goods.
There are 02 major symptoms of inflation can be identified. They are:
Types of Inflation.
Causes of Inflation
Demand pull inflation is caused by rise in the demand for goods and there by rise in the level of aggregate demand of the economy. When the demand for goods and services are increased there will be more demand for factors of production. As a result the reward for factors of production will be made higher resulting in high cost of production. This situation will ultimately result in a high prices for goods and services.
Cost push inflation is also known as “import cost push inflation”. Cost push inflation occurs when the import level of the country is higher than the export level. When the import level is higher than exports there will be money outflow from the country. As the import transaction will demand more foreign currency the domestic currency will depreciate. As a result, the imports will become expensive and it will result in an inflationary situation in the country.
If consumers predict that in near future prices of goods are going to be high they will carry out their purchases to obtain an advantage by early purchases. When everyone start doing early purchases there will be more demand for goods and services resulting in high prices and there by create inflationary situations. If consumers predict that in near future prices of goods are going to be lowered they will delay their purchases to obtain an advantage by late purchases. When everyone decides to delay purchases there will be less demand for goods and services resulting in lower prices and there by create a deflationary situation.
This is where people hold more money in their hands and there will be more money circulating around the market. This will give an opportunity for the customer to demand more goods as they hold money to purchase. This situation will result in high prices as there is excessive demand for products. Open market operations and other monetary policy tools are used to control the money supply of an economy.
This assumes that resources do not move quickly from one use to another and that it is easy to increase wages and prices but hard to decrease them.Given these conditions, when patterns of demand and cost change , real adjustments occur only very slowly.
Costs of Inflation
Anti-Inflationary Policies by Government
Interest rates on borrowings are made high so that the people will borrow less money from banks. This will result in drop in the consumption level. Also interest rate on savings are also made high so that people will save more money resulting in lower consumption level and higher savings level. These activities will reduce the level of aggregate demand and there by reduce the money supply of the economy ultimately result in a deflationary situation.
When the government expediture are mader lower there will be drop in injections to the circular low of income. This will result in drop in aggregate demand and there by reduction in the price level of the economy.
When government impose high income taxes there will be an increase in the withdrawal level from the circular flow of income. The increase in the withdrawal results in a drop in the level of aggregate demand resulting in the reduction on general price level of the economy. When high import taxes are imposed the importers will be dicouraged and there will be drop in import level. This will prevent the currency outflowing situations and the currency will be prevened from getting depreciated. As a result of this process the cost push inflationary situation will disappear.
The treasury bond/bill rates are made higher so that people would by those bills and bond. When people by those bond the money people pay for the bonds will be kept in the reserves and the reserve level will increase. This will result in a drop in the money supply in economy and there by the arregate demand will fall. When the aggregate demand falls the price level will go down and inflaion will reduce.
When monopolies exist in the market they can increase the price as they wish as the consumers will have no choice but to but those products at a higher price. This can create inflationary situation in the country. So that government will bring regulations to prevent monopoly situations in the market.
Government can impose a minimum price for goods and services so that the sellers will have to sell those goods at the maximum price or a price lower than the maximum price. This will prevent sellers charging excessive prices and there by prevent inflationary conditions.