EFFECTS OF INFLATION AND HOW TO CONTROL INFLATION,
Inflation refers to the general increase in prices of goods and services in an economy over a period of time. It is typically measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI).
While moderate inflation is considered normal in a growing economy, high and unpredictable inflation can have several effects, both positive and negative, on various aspects of an economy and society:
- Reduced purchasing power: As prices rise, the purchasing power of consumers decreases. This means that the same amount of money buys fewer goods and services, leading to a decline in the standard of living for individuals and households.
- Impact on savings and investments: Inflation erodes the value of money over time. As prices rise, the real value of savings and fixed-rate investments (e.g., bonds) decreases. Investors may seek higher returns on investments to compensate for inflation risk.
- Uncertainty and decreased consumer confidence: High inflation rates can lead to economic uncertainty and decrease consumer confidence. People may delay purchases or avoid long-term investments due to concerns about future price levels.
- Effect on interest rates: Central banks often respond to high inflation by raising interest rates. Higher interest rates can discourage borrowing and spending, which can slow down economic growth.
- Wage-price spiral: Inflation can trigger a wage-price spiral, where workers demand higher wages to keep up with rising living costs, and businesses, in turn, raise prices to cover the increased labour costs. This cycle can lead to a self-reinforcing loop of rising wages and prices.
- Redistribution of wealth: Inflation can lead to a redistribution of wealth in an economy. Debtors benefit from inflation as they can repay their debts with less valuable money. However, creditors, people with fixed incomes, and savers may suffer as the purchasing power of their assets declines.
- Effect on exports and imports: Persistent inflation can make a country’s goods and services more expensive relative to those of other nations. This can negatively affect exports and potentially lead to a trade deficit.
- Impact on government finances: Inflation can affect government revenues and expenditures. Rising prices may increase tax revenues for the government, but it can also lead to higher costs for social programs and public services.
- Speculative behaviour: In high-inflation environments, people may engage in speculative investments and hoarding of goods as a way to preserve wealth, which can further exacerbate price increases.
- Social and political consequences: High inflation rates can lead to social unrest and political instability, as citizens become discontented with declining purchasing power and economic hardship.
Inflation has both positive and negative effects: (a) The positive effects of inflation
(1) Reduction in burden of debt: During inflation, debtors gain because there is too much money in circulation, which enables them to pay their debts with ease. (2) Higher profit margin: Because producers are selling their goods at their prices, this will lead to higher profits.
Inflation control measures
Identify the effects of inflation/deflation. Discuss Nigeria’s inflationary experience and the various control measures adopted by the government. (3) Higher tax yield: As a result of the volume of money in circulation government is able to realize a high yield from taxes. (4) Higher output: Higher prices of goods and services during inflation encourage producers to embark on large-scale production, resulting in greater output.
(5) The negative effects of inflation It discourages savings: During inflation people spend more money, leading to low or no savings. (6) Increase interest rate: The rate a: which banks give loan to customers increase during inflation.
Identify the different types of inflation, the alternative causes and control measures.
Identify the effects of inflation/deflation.
Discuss Nigeria’s inflationary experience and the various control measures adopted by the government. (7) Income redistribution: Inflation redistributes income haphazardly. There is a fall in real income especially for those on fixed income e.g. pensioners.
(8) Creditor loss: The value of money received is far less than the value of me lent out. (9) Loss of value for money: Money losses its value generally during the period of inflation
(10) Fall in the standard of living: Inflation brings lots of problems to salaries ea as they spend it on costly goods and services, leading to a falling standard of living.
(11) It discourages investment: Low value of money coupled with little or no savings discourages investments. (12) Balance of payment problems: Inflation causes the balance of payment problems since foreigners will want to sell and also do minimal buying from countries with inflationary trends.
(13) It discourages exports: High prices during inflation discourage export since such countries will be high-cost producers.
HOW TO CONTROL OF INFLATION IN ANY ECONOMY
(1) Use of monetary policy measures: The use of contractionary monetary measures such as increases in bank rates, open market operation, deposit ratio and moral persuasion can help to control inflation.
(2) Use of fiscal measures: Inflation can also be controlled with the use of fiscal measures to reduce the amount of money in circulation, e.g. increase in direct taxation.
(3) Effective price control system: Inflation can also be controlled through the use of an effective price control system e.g. price control board by government officials and the application of rationing to maintain price level.
- loans for businesses
Identify the different types of inflation, the alternative causes and control measures. Identify the effects of inflation/deflation. Discuss Nigeria’s inflationary experience and the various control measures adopted by the government.
(4) Reduction in government expenditure or surplus budget: The government should reduce expenditure and it will go a long way toward reducing the amount of money in circulation. (5) Industrialization: Industrialization will reduce over-reliance on imported goods and brings about an increase in output which will reduce prices.
(6) Checking the activities of hoarders: The activities of hoarders should be checked to prevent an increase in the 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 subsidies to enterprises: Inflation can also be controlled by granting subsidies to enterprises and companies producing essential products to reduce the cost of production and the product’s prices.
Removal of bottlenecks in the distribution system: Removing bottlenecks in the distribution system i.e. provision of good road and storage facilities is another means of controlling inflation.
Discouragement of importation: Government should discourage importation from countries already experiencing inflation, as a way of controlling it.
Use of income policies: The use of income policies such as wage freeze and delay in promotions is equally a way of controlling inflation.