An economy is an abode of many fluctuating metrics that determine the state of the economy, its wealth, and its stand in international comparison. In every economy, one of the major threats to economic growth and development is the outburst of prices known as inflation. Inflation can simply be referred to as the persistent rise in the general price level of goods and services. It is often seen as a silent threat but its effects on the economy are far-reaching and devastating.
Inflation is a threat to any economy that relies on soaring prices to rising interest rates, inflation can leave individuals, businesses, and governments spinning in a downward spiral. Inflation either moderate or hyperinflation can be caused by many factors including an increase in money supply, an increase in aggregate demand, and scarcity of commodities.
The impact of inflation is spread across all economic agents; on the consumers, daily expenses become more expensive therefore reducing purchasing power and eroding savings, on business organizations demand-pull inflation can bring about higher profit but cost-push inflation can reduce investments.
Inflation can indeed be explosive, and destructive and tends to be uncontrollable when it is hyperinflation as in countries like Zimbabwe and Venezuela where inflation spirals out of control, consequently the country’s battle with economic recession. Effective control of inflation is one of the macroeconomic objectives of every government to ensure price stability.
Inflation can be tackled with the following measures:
1. Contractionary monetary policies
Hawkish monetary policies from monetary authorities are essential to control inflation. Monetary policies such as bank rates, reserve requirements, liquidity ratio, and the use of government securities through the Open Market Operation(OMO) are tools to influence the supply of money to tackle inflation in an economy.
2. Fiscal policies
Tightening fiscal policy such as increasing taxes or reducing government spending can help to control inflation. Government spending has effects on aggregate demand in an economy and a reduction in government spending will reduce demand from the government sectors which can help control inflation
3. Price regulation
Regulation of prices of essential commodities can help to control inflation. Government imposing a price ceiling of which producers and sellers cannot sell above can help to curb arbitrary increases in the price of goods and services.
4. Checking of hoarding activities
Hoarding of commodities is part of the unscrupulous ways sellers or producers can create artificial scarcity to sell at higher prices. This can result in inflation if not curbed and if it is on commodities that have major effects on the economy such as hoarding of petrol.
Supply-side policies:
Policies that improve productivity and competitiveness can help to reduce inflationary pressures by increasing the supply of goods and services.
No economy exists without inflation or deflation but proper measures must be in place to save the economy from its adverse outcome.
