The night has been long and the sun has not dawned upon us this time. Wondering if this is how we will get to the basics of inflation. Actually Not! I was just referring to the long span of inflation inflicted nation of ours. Every morning you can read one or two pieces on inflation, govt. measures, affected poor, non-affected rich class, budget planning goes chaotic in middle class, etc. But the question is why we are not able to control this demon named Inflation. I’m a strong believer that govt. is never the sole responsible authority for any chaos or problem in the nation faces (irrespective of the ruling party- no soft corners). In fact, everybody in the nation holds some responsibility and can contribute towards a stable economy. Well, let us see and understand how.
Let us begin with what is Inflation?
Inflation is actually the rise in prices of goods and services over a period of time. When the general level of prices increases, one unit of currency can buy fewer goods and services with it. It also refers to the decreasing purchasing power of the people and the nation as a whole. Inflation is measured with tools like inflation rate and price index, mostly CPI (Consumer Price Index). And Inflation rate is the increase in the level of price index over a period of time and change of price level. With simple equation here we can understand that:
Where, Ir = Inflation rate
P1= current level of price.
P0= price level a year ago.
So moving ahead let us see the various factors that cause inflation and the consequences it brings. In general whenever aggregate demand exceeds the aggregate supply of goods and services, inflation occurs. There are various factors that affect demand such as increase in money supply, cheap monetary policy, deficit financing, black money, increase in exports, etc. Whenever there is increase in supply of money, there is increase in the spending capacity of the people, and it leads to increase in demand of goods. Consumers spend more due to conspicuous consumption and demonstration effect. It has also increased because of the credit facilities as it facilitates them with ability to buy goods on hire purchase and installments. This causes undue increase in demand and thereby increasing the inflation. In deficit financing, in order to pay it dues and debts, the govt. borrows from the public and print more notes which again circulate in the market giving rise to increase in demand of goods. The same effect occurs with the black money as it gives freedom to people to buy goods which they would not have been able to otherwise. And this black money is primarily due to tax evasions and corruption. Similarly there are factors such as industrial dispute, shortage of factors of production, increased exports, artificial scarcity, etc. that affect the supply of goods in the economy. This causes instability in the economy and the demand-supply cycle is affected. In lieu it causes inflation. It decreases the real value of money and other monetary items over time. Moreover the uncertainty over future inflation discourages investment and savings. Also the excess demand is countered by hoarding which causes further shortage of goods thereby further increasing the price. So it ends up in a vicious cycle which finds no way out.
So keeping in view all the factors that cause inflation, inflation is categorized into four types viz:
1) Wage Inflation: It is also called as demand pull or excess demand inflation. This happens when total demand of goods and service exceeds the total supply of goods.
2) Cost Push Inflation: as the name suggests, if there is an increase in the production cost of goods, there will be unprecedented increase in the price of goods hence causing cost push inflation. E.g. if labour prices go up at a particular place, the goods manufactured at the site would face increase in the price.
3) Pricing Power Inflation: This is a type of inflation which is caused by business houses and industries when they decide to increase the price of goods to increase their profit margins. It is also called as administered price inflation. The point to be noted is it will never happen during downturn of the economy, economic slowdown or in times of recession.
4) Sectoral Inflation: this type of inflation takes place when there is increase in the price of goods and services produced by a certain sector of industries. E.g. increase in the cost of crude oil would increase the price of all the products related to crude oil, so if there is increase in the price of fuel, the ticket fares would also go up.
After looking on the various factors, we can say that if there is regulated supply of money/income and there is a balanced demand-supply cycle, inflation can be controlled to a greater extent.
We can take some monetary and fiscal measures regarding the same. One of the best ways is to put a limit on credit ability. This can be done by raising the bank rates, selling securities in the open market, raising the reserve ratio. However this is not effective if there is cost-push inflation. This can be used only if there is demand pull inflation. Fiscal measures come to greater relief to curb inflation. This can control government expenditure, personal consumption expenditure, private and public investment. This can be achieved by reduction in unnecessary expenditure, increase in taxes (not to be kept so high so as to discourage investment, savings and production), increase in saving and attract higher fetching saving policies. An important measure is to adopt anti-inflationary budgetary policy. The public debt should not be paid back during the time of inflation and instead postponed to some future date unless the inflation is controlled. Other measures are to increase the production if factors favor, adopting a rational wage policy but this generally practiced in case of hyperinflation. Price control and rationising are considered quite useful in controlling inflation. This is done by fixing the upper limit of the prices of the goods. Rationising aims at distributing consumption of scarce goods so as to make them available for large number of consumers. It is applied for essential consumer goods and to stabilize the prices.
So this is how we go about Inflation. Instead of panicking, creating chaos and playing the blame game we can rather switch to the wiser ways of handling this inflation. All way through I feel it is more related to the regulated demand-supply chain, economic sentiments and judicial expenditure by the people. This is what can really curb inflation.