Hello welcome to this class on the topic: INFLATION: We would look at the Definition of inflation, Types and causes of inflation, effects and control of inflation in economics.
Table Of Contents
- Definition of Inflation
- Types of inflation
- Causes of inflation
- Effects of inflation
- Negative effects of inflation
- Control of inflation
Definition of Inflation
Inflation may be defined as a persistent rise in the general price level of goods and services. Inflation occurs when the volume of purchases is permanently running ahead of production, with too much money in circulation chasing too few goods.
TYPES OF INFLATION
There are four main types of inflation and these are;
- Demand pull Inflation
- Cost push inflation
- Hyper inflation
- Persistent or creeping inflation
1. Demand pull inflation: Demand pull inflation occurs when consumers have high purchasing power, leading to increases in aggregate demand without corresponding increase in supply. In other words, this inflation occurs when the demand for goods and services is greater than their supply. The factors responsible for this types of inflation may be due to population increase; increase in worker salaries and wages.
2. Cost push inflation: Cost push inflation occurs when increases in cost of production are passed on to consumers in the form of high prices of goods and services are pushed up by The rising costs.
3. 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. Prices of goods and services rise at a fast rate, leading to money loosing its value or its ability to buy goods. War, budget deficits, etc at the major causes of hyper inflation.
4. Persistent or creeping inflation: 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 fall in supply of goods and services. In other words, when inflation involves a slow but steady rice in the general prices of goods and services, it is known as creeping inflation.
CAUSES OF INFLATION
Here we take a look at the 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 their scarcity and when supply cannot meet up with high demand, inflation sets in.
- War: War is a major causes 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 fewer goods.
- High cost of production: When there is high cost of production, manufacturers build in this high cost into the cost per unit and pass it to consumers, leading to cost pull inflation.
- Budget deficit: When government expenditure is more than its income, is result in budget deficit and this leads to inflation.
- Population increase: A sudden rise in population will result in a corresponding rise in demand for goods and services and if there is no corresponding rise in supply, it will result in inflation.
- Excessive bank lending: This can lead to excessive money in circulation chasing fewer goods and services.
- Level of importation: High cost of importing raw materials can lead to high cost of goods, which is passed to chasing few goods and services.
- Hoarding: Hoarding, which is the act of creating artificial scarcity of goods, can lead to inflation.
- Inadequate storage facilities: When goods produce cannot be stored for future use, it can lead to scarcity, resulting in inflation.
- Industrial strike: Prolonged strike can cause scarcity of goods and services, leading to inflation.
- Money laundering: Mass transfer and injection of money into circulation is another causes of inflation.
EFFECTS OF INFLATION
Inflation has both physical and negative effects; below are the effects of inflation.
Let’s look at the positive effects of inflation
- Reduction in burden of debt: During inflation, debtors gain because there is too much money in circulation, which will enable them to pay their debts with ease.
- Higher cost margin: Because producers are selling their goods at higher prices, this will lead to higher profits.
- Higher tax yield: As a result of high volume of money in circulation, government is able to realise high yield from taxes.
- Higher output: Higher prices of goods and services during inflation encourage producers to embark on large-scale production, resulting in greater output.
Let’s now look at the negative effects of inflation
- It discourages savings: During inflation, people spend money, leading to low or no savings.
- Increase interest rate: The rate at which bank give loan to customers increase during inflation.
- Income redistribution: Inflation redistributes income haphazardly. There is a fall in real income especially of those of fixed income, e.g, pensioners.
- Creditor loss: The value of money received is far less than the value of money lent out.
- Loss of value for money: Money losses its value generally during the period of inflation.
- Fall in standard of living: Inflation brings lots of problems to salary earners as they spend it on costly goods and services, leading to a falling standard of living.
- It discourages investment: Low value of money coupled with little or no savings discourages investments.
- Balance of payment problems: Inflation causes balance of payment problems since foreigners we want to sell and also do minimal buying from countries with inflationary trend.
- It discourages exports: High prices during inflation discourages export since such countries will be high cost producers.
We have studied the definition of inflation, types and causes of inflation, effects of inflation now let’s look at control of inflation.
CONTROL OF INFLATION
- Uses of contractionary measures: The use of contractionary monetary measures such as increase in bank rate, open market operation, deposit ratio and Moral persuasion can help to control inflation.
- Use of fiscal measures: Inflation can be controlled with the use of fiscal measures to reduce the amount of money in circulation, e.g, increase in Direct taxation.
- Effective price control system: Inflation can be controlled through the use of effective price control system, e.g, price control board by government officials and the application of rationing to maintain price level.
- Reduction in government expenditure or surplus budget: The government should reduce expenditure and it will go a long way towards reducing the amount of money in circulation.
- Industrialization: Industrialization will reduce over reliance on imported goods and brings about increasing output which will reduce prices.
- Checking the activities of hoarders: The activities of hoarders should be checked to prevent increase in prices of goods.
- Increase production: Inflation can be controlled by increasing production or output in order to bring down the prices of goods.
- Granting of subsidy to enterprises: Inflation can also be controlled by granting subsidy to enterprises and companies producing essential products to reduce cost of production and the product prices.
- Remover of bottlenecks in distribution system: Removing bottlenecks in the distribution system, i.e. Provision of good road and storage facilities is another means of control of inflation.
- Discouragement of importation: Government should discourage importation from countries already experiencing inflation, as a way of controlling it.
- Use of income policies: Use of income policies such as wage freeze and delay in promotions is equally a way to control inflation.
Revision Questions
- What is inflation?
- What are the types of inflation we have.
- What are the causes of inflation
- List the effects of inflation and the negative effects.
- What are the methods of controlling inflation.