Written by Inflation is a rise in the average prices of goods and services in an economy over time.
When inflation occurs, the purchasing power of money decreases, so that money can now buy less of what it used to buy.
In response to inflation, policymakers and regulatory agencies usually take measures to control inflation and prevent further price increases.
When the prices of goods and services in an economy increase, policymakers and regulatory agencies must take measures to prevent further price increases.
These measures typically come in three forms: Fiscal measures, Monetary measures, and Direct measures.
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Monetary measures for controlling Inflation
These are one of the most effective ways to control inflation and maintain stability in the economy.
Monetary measures refer to the actions taken by a central bank to control the supply of money in the economy
It involves the use of money supply and credit creation to control or curb inflation.
When inflation is high, the central bank typically adopts tight monetary policies to reduce the supply of money in the economy.
The following monetary measures can be used by the Central Bank to control inflation:
1. Increasing bank rate: The bank rate is the interest rate at which the central bank lends money to commercial banks.
If the central bank increases the bank rate, it becomes more expensive for commercial banks to borrow money from the central bank.
In turn, commercial banks will increase the interest rate at which they lend to the general public, which will decrease the money supply and slow down inflation.
2. Increasing reserve requirements: If the central bank increases the amount of cash that commercial banks must hold in reserves, the lending ability of commercial banks will decrease.
This reduction in lending will result in decreased aggregate spending, which can help control Inflation.
3. Open Market Operations: Central Banks can also use open market operations to control inflation.
When the central bank wants to control inflation, it will sell securities, which will reduce the amount of money in circulation in the economy.
This decrease in the money supply can help to slow down inflation by reducing the demand for goods and services, making it more difficult for businesses to increase their prices.
4. Selective Credit Controls: This is the regulation of commercial banks’ lending to specific sectors of the economy.
The main goal of restricting lending to certain sectors is to help reduce demand in those sectors and control inflation.
Fiscal Measures for Controlling Inflation
Fiscal measures of controlling inflation refer to the actions taken by a government to manage its spending and taxation policies, with the goal of controlling inflation.
In other words, fiscal measures mean the government controls inflation by changing its spending and taxation policies.
The fiscal measures used to control inflation are:
1. Cutting Government expenditure: Government expenditure refers to the amount of money spent by the government on public goods and services, such as education, healthcare, infrastructure, and defense.
If the government reduces its expenditure, the amount of money in circulation will decrease, resulting in a reduction in aggregate demand.
This reduction in aggregate demand will help slow down economic activity and help control inflation.
However, it is important to note that decreasing government expenditures in some cases, is not an effective way of controlling inflation.
For example, during period of economic development, large volume of government expenditure on social amenities is required. So, cutting government expenditure in such case is not beneficial to the economy.
2. Increasing taxes: Another fiscal measure to control inflation is to increase taxes.
When taxes are increased, people and businesses have less disposable income to spend, which leads to a decrease in demand and a subsequent decrease in prices.
3. Public borrowing: The government usually borrows money from individuals or institutions by issuing bonds or other debt instruments.
This is called public borrowing.
When the government is borrowing money, it is essentially taking money out of circulation as the individuals or institutions that lend the money now have less disposable income to spend on goods and services.
The result is the demand for goods and services in the economy will decrease and the inflation will slow down.
Direct Measures of Controlling Inflation
Direct measures of controlling inflation are policy actions that directly target the prices of goods and services in the economy, rather than affecting the supply or demand of money in the economy.
These measures can be used to control inflation in the short term, but they can also have negative long-term consequences if they are not implemented properly.
The direct measures of controlling inflation are as follows:
1. Price controls: This is the most common direct measures of controlling inflation.
It involves setting maximum prices for certain goods or services to prevent them from becoming too expensive.
It involves establishing of legal upper limits beyond which prices should not rise.
By setting maximum prices, the government can slow down inflation
2. Rationing: Another direct measure of controlling inflation is rationing.
Rationing is the limiting the amount of certain goods or services that consumers can purchase.
Rationing is a good way to control inflation in the short term, but it can also lead to hoarding and black markets activities.
3. Wage controls: Wage control is a direct measure of controlling inflation in which the government regulates the amount of wages that workers can earn.
Wages control help in preventing inflation from increasing the costs of labor, which could lead to high prices.
