An idea on measures to control inflation

Inflation occurs when an economy grows due to increased spending without an accompanying rise in the production of goods and services. When this happens, prices go up, and the currency in the economy is worth less than it was before. The money will essentially stop buying as much as it did before.

If a currency is worthless, its exchange rate weakens compared to other currencies. However, this depends on whether other countries inflate less than yours.

If another country’s currency increases faster than your country, their currency could strengthen. It is a fundamental argument for purchasing power parity. The government takes certain measures to control inflation like price control, rationing, increasing the supply, etc.

Causes of Inflation

Multiple factors can cause inflation; the most common are cost-push and demand-pull inflation. Recently, there has been a sudden increase in demand, as coronavirus restrictions resulted in food and labour shortages occurring across the country.

Here are the most important causes of inflation:

Rising Prices

Increasing prices happen once the demand for merchandise and services exceeds the economy’s ability to fulfil those demands. When this demand cannot match the supply, it puts upward pressure on the prices, inflicting inflation.

Cost-push inflation

Cost-push inflation increases costs once the value of materials and wages rises. Manufacturers and suppliers transfer these expenses to customers by increasing the prices of such goods and services.

Accumulated Monetary Resource

The total cash in circulation outlines the accumulated monetary resources. It has cash, coins, bank accounts, and balances, in keeping with the RBI. 

Suppose the money supply rapidly increases, and it exceeds the production speed. In that case, it might lead to inflation and significantly rising prices.

Measures to Control Inflation

Here are the common measures to control inflation.

To increase production

One of the foremost measures to manage inflation is to increase the assembly of essential commodities like food, clothing, coal oil, sugar, vegetable oils, etc. If there is a need for some commodities, the government might import raw materials for such items on a favourable basis to expand their production.

Price control

Price control-related distribution is another direct control method used to determine inflation. 

Price control advises setting a greater price cap for essential shopping products. They are of the highest importance and mandated by law, and anyone charging less than these rates is subject to legal action. 

Price regulation, on the other hand, is challenging to implement.

Rationing

Rationing tries to distribute consumption of limited products, making them available to a wide range of customers. It is useful for essential commodities such as wheat, rice, sugar, coal oil, etc. 

Its purpose is to stabilise the costs of necessities while also ensuring distributive fairness.

What are the Monetary Measures to Control Inflation?

To control inflation, the increase in aggregate demand has to equal. The government can control inflation to regulate aggregate demand by increasing the availability of goods and services while decreasing cash incomes.  

Monetary measures aim at reducing money incomes.

Credit control

Monetary policy is a critical economic metric. The country’s financial institutions use various methods to regulate the volume and quality of lending. 

It raises bank rates, sells securities on the open market, increases the reserve ratio, and employs a range of selective credit management techniques, such as increasing margin requirements and limiting client credit. 

If cost-push causes inflation, the financial policy may not control it. Due to demand-pull considerations, only the financial policy will be beneficial in reducing inflation.

Conclusion of currency

One of the monetary strategies is to demonetize higher denominations of currency. When black money is abundant in the country, the government may implement such measures occasionally.

Issue of latest currency

The issuance of fresh currency notes and coins is the most extreme monetary action. Under this approach, the government substitutes one new note for various previous currency notes. Likewise, they modify the value of bank deposits. 

A country follows such a measure when it has a large number of notes and is experiencing hyperinflation. It is a good precaution. It is, however, unfair because it disproportionately affects small depositors.

Conclusion

Inflation occurs when an economy grows due to increased spending without an accompanying increase in the production of goods and services. The currency will essentially stop buying as much as it did before. 

Causes of inflation can be multiple, with demand-pull and cost-push inflation among the most common. Inflation can, therefore, be controlled by increasing the provision of products and services and reducing cash incomes. 

Monetary measures aim at reducing money incomes. One of the monetary measures is to demonetise the currency of upper denominations. Such measures effectively tackle the issue of black money in a country.