Inflation:causes and solving - Article Example

Introduction The summary of the article helps to define inflation as a persistent rise in prices that cause the purchasing power of a nation to significantly drop. This is a normal economic syndrome as long as the annual rate or percentage remains comparatively low. Once the percentage rises over a pre-determined level, it is considered an inflation crisis. And then it has its impacts across several facets of the economy. Causes of Inflation From the article, one can infer that expansive public spending as a result of budgetary surpluses, population growth, and rapid growth in demand are the root causes of inflation. By definition, a budgetary surplus is the amount by which government revenue exceeds government expenditure during a financial year. This excess of revenue over expenditure means the government has more money to inject into the economy and up the circulation of money in the economy. In an unrelated manner, the amount of money in circulation in a country's economy could result from the government printing an excess of money to deal with a crisis. This brings excess money to the disposal of citizens who would normally manifest their propensity to spend by a growth in their demand. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand. On the other hand, population growth could be the direct effects of human factors like migration or high birthrates. That is to say the higher the birth rate, the higher the population at any particular time. Likewise when the number of people entering a country as immigrants outweighs the number of people leaving the country, the size of that country's population is bound to increase. Meanwhile, a growth in demand entails not only an increase in the quantity of demanded of goods and services, but also a complete rightward shift of the demand curve. According to macroeconomic theory (Lawrence & Terry, 2003) the impact of these factors in causing inflation can best be understood by looking at how they change the trend of both aggregate demand and supply in an economy. Firstly, a budgetary surplus increases the amount of money in circulation in the economy. Matching such surplus to the population growth, means a surge in the aggregate demand for goods and services with a consequent increase in the spending power of individuals. Other factors being constant, the capacity of the country to produce goods and services is exceeded, leading to the category of inflation called demand-pull inflation. The article supports the above findings by holding that the size of increase in aggregate demand significantly exceeds real supply levels in a sustainable manner. As the increase in aggregate demand is unmatched by a similar increase in production, uncalculated consumption and the failure to nurture production lead to sudden increases in prices and hence an increase in purchasing power. In an unrelated manner, the supply of money in an economy can increase when the government adopts a policy to print excess money in a bid to put a crisis under control. This view about the cause of inflation can be understood through a review of the quantity theory of money which says that an abnormal growth in the money supply in an economy would cause inflation. This happens because the extra money boosts the level of demand, and so causes demand-pull inflation. The most resounding case in point is the hyperinflation in Zimbabwe scaling over 6,500% (six thousand five hundred percent). Such policy to increase the supply of money has the spin-off effects of injecting more money into the economy, as well as increases the citizen's disposable income. This increase in disposable income always translates into an increase in the propensity to consume and then to a consequent increase in the demand for goods and services. When an increase in the demand for goods and services is not parallel to the production and supply capacity of the economy, prices end up rising at an extremely high speed to keep up with the currency surplus. This is also called demand-pull inflation, in which prices are forced upwards because of a high demand. So, economists argue government policies that give way to increases in monetary supply, such as attempts to stimulate the national income of a country will not have long-term effects on real output. With output not responding to demand the increase in demand in the face of a shortage in supply would mean too much money chases fewer goods and services. This therefore generates inflation. Solving Inflation Putting inflation under control is increasingly the dominant priority of government economic policy in many countries. For these policies to be effective, they need to focus on the underlying causes of inflation in that economy, such that policies aimed at reducing inflation caused by an increase in aggregate demand should look to reduce the level of aggregate demand. In like manner, inflation arising from increase cost of production would be stemmed by controlling production costs and prices in the economy. If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced. As per this article, there are a good number of ways to put inflation under control. Given that the article identifies demand-pull inflation as the cardinal cause of inflation, the article rightly suggests that it can be controlled by stimulating productivity, increase the forces of supply, and manage the necessary administrative controls to reduce prices through effective fiscal and monetary measures. If a higher output can be produced at a lower unit production cost, then the economy can attain and maintain economic growth without inflation. An increase in aggregate supply is often a key long term objective of government economic policy. The prime motive of these measures is to reduce the pressure of demand and can take the form of raising taxes to reduce disposable income, or increasing interest rates to discourage borrowing. When disposable income is reduced and borrowing drops, consumers have comparatively less money to spend while prices drop and inflation is brought under control. For the case of developing countries, the article contends that their productivity and supply capabilities need to be reinforced. With such reinforcement, local production is encouraged and the concept of 'dumping' from developed countries is significantly halted. Hence inflation is strategically checked. Also, this reinforcement can best be implemented by engaging the services of economists and researchers who can work to build a more competitive environment that can increase the economies competitiveness, thereby controlling inflation. The policies above entirely focus on reducing the pressure from demand and balance it with supply. In relation to reducing the supply of money, there are a number measures that economies can be saved from inflation. As for the case of Zimbabwe, the government can print less money, and then take other steps to withdraw money in circulation from the economy through the central bank. Each of these categories of policies to respectively reduce demand pressure and reduce the amount of money in circulation has advantages and disadvantages. The policy to reduce demand is effective but would prove unpopular with consumers and may cause a minor recession. Meanwhile, the second policy to reduce the supply of money can be effective, but the major drawback is that it would be difficult for the state to dictate to private firms how much to charge for inputs and also how much to pay theor workers. Read More