Introduction inflation is, at the same time, one of the most dreaded and one of the most misunderstood of economic phenomena. The different methods used to control inflation are known as antiinflationary measures. The target is set in terms of the 12month rate of increase in the total consumer price index cpi, the most commonly used indicator of inflation in the canadian economy. As the inflation crosses the desirable rate, several measures to control inflation are undertaken. Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. The author proposes an alternative measure of inflation that captures the intuition behind the use of core measures. The variable used to measure inflation performance is the stan%. Inflation is generally controlled by the central bank andor the government. These measures attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary. For example, if the base year cpi is 100 and the current cpi is 110, inflation is 10 percent over the period.
Measuring inflation consumer price index economics help. Types of inflation from the quantitative point of view creeping inflation the rate of inflation doesnt exceed the rate of production growth, creeping inflation is inflation. The core is rotten james bullard an earlier version of this article was delivered as a speech to the money marketeers of new york university, new york, new york, may 18, 2011. Administrative measures 1 ration wage policy keeps cost of production under control cost control leads to price control 3 rationing rationing of goods that are short in supply keeps price under control 2 price control direct price control by fixing max. D department of accounting faculty of management sciences university of calabar, calabar cross river state nigeria abstract. The current government is committed to the control of inflation it has an explicit inflation target for rpix of 2.
In this article, we will look at the fiscal policy and monetary measures to control inflation that the government undertakes. When the inflation is less than 3% it is known as creeping inflation. The most important and commonly used method to control inflation is monetary policy of the central bank. Monetary measure the most important method of controlling inflation is monetary policy of the central bank.
However, traditional measures of monetary policy cannot assist in this as the global. Even if one could claim to have a good understanding of the common features of the economies in question. Our paper contributes to the literature in several ways. Sep 27, 2010 here are some of the measures that are taken by banks as well as goverment to control inflation slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Inflation should be controlled in the beginning stage, otherwise it will take the shape of hyperinflation which will completely run the country. But, common anti inflation measures especially contraction. Dec 29, 2012 the different methods used to control inflation are known as antiinflationary measures. We know from experience, combined with cogitation, that the prices of commodities will, over time, rise and fall. Since the cpi measures the prices of consumer goods and services. Monetary measures by rbi credit control in detail bank rate. The opposite of inflation is deflation which means a fall in the general level of prices. Inflation inflation is a sustained increase in the general price level of the goods and services in an economy over a. The economists do believe that the inflation beyond the moderate rate is bad and can be disastrous.
Nov 21, 2019 inflation is generally controlled by the central bank andor the government. Finally, policymakers examine a variety of core inflation measures to help identify inflation trends. This study was carried out to evaluate inflation accounting and control through. Earlier studies have noted some advantages of trimmedmean core inflation measures over exclusionbased measures. Most central banks use high interest rates as a way to fight inflation. In this view, eradicating inflation would have a prohibitively high cost in widespread and sustained unemployment.
Inflation policies to control inflation economics tutor2u. Meaning, types, control inflation meaning of inflation inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Inflation should be controlled in the beginning stage, otherwise it will take the shape of hyper inflation which will completely run the country. This occurs when the rate of rise in prices is in the intermediate range of 3 to less than 10 per cent.
Inflation refers to the appreciable and persistent rise in the general price level. Finally, inflation tends to breed such misguided remedies as price regulation and profiteer. Some of the important measures to control inflation are as follows. Two measures of inflation and fed policy advisor perspectives. In inflation, there is a flow of the excessive money in economy that creates excess demand in the market compared to supply. Of particular concern has been the rise in the core, or sustained, inflation rate from below the 2 percent level in the early 1960s to near the doubledigit level by the late 1970s. Often, the countries use monetary measures to keep the situation under control. Monetary policy measures and inflation accountingcontrol in. The bank rate policy is used as an important instrument to control inflation. If we extend the theory of a costofliving index to an intertemporal or multiperiod context see pollak, 1975, then expected changes in the price of future consumption streams can affect current inflation through their impact on lifetime utility.
For instance, uk has fixed the inflation target at 2%, it is generally clear from the policy statements such as manual credit policy that the central bank would try to control the inflation once it crosses the comfortable level. Walking inflation occurs when prices rise moderately and annual inflation rate is a single digit. The authors however stressed that the large measurements errors and high room for. However, in theory, there are a variety of tools to control inflation including. Monetary policy tools and inflation in kenya nathan m. Inflation can, therefore, be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand. Feb 10, 2020 there are many methods used to control inflation. The different measures as shown in figure5 used for controlling inflation are explained below. What drives inflation in the new eu member states european. This tutorial deals with measures to control inflation 1. Monetary policy higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation. Deflation meaning, reasons of deflation, measures to.
Since inflation shows disequilibrium between demand and supply of goods at current prices therefore measures should be taken either to decrease the demand or increase the supply of goods and services. Dec 04, 2012 in this module, the learner will understand the monetary as well as fiscal measures to control the rising inflation. Eu membership, each of the cee countries has committed to joining the. Mutwiri school of business, kenyatta university, kenya, email. There are various measures to control the inflation effectively before it gets out of hand. The bank rate, also called as the central bank rediscount rate is the rate at which the central bank buys or redsicounts the eligible bills of exchange and other commercial papers. Demand pull inflation means inflation from low demand for. The control of inflation using central bank of nigeria cbn monetary policy includes abstract and chapter one, complete project material available the control of inflation using central bank of nigeria cbn monetary policy abstract through the instrument used in monetary policy help us by the control of inflation in an economy. Feb 18, 20 the different methods used to control inflation are known as antiinflationary measures.
Project topic on the control of inflation using central bank. If the gross domestic product growth rate is more than the ideal of 23 percent, excess demand can generate inflation by. Some of the most important measures that must be followed to control inflation are. The most important method of controlling inflation is monetary policy of the central bank. The main policy tools to control inflation include monetary policy use of interest rates fiscal policy, supply side policy. Multiregression analysis 19732010 akabomita asuquo, ph. How can the authorities reduce the rate of inflation. The monetary measures which are widely used to control inflation are. Core consumer inflation focuses on the underlying and persistent trends in inflation by excluding prices set by.
Money loose purchase power, people hold as little money as possible. Cost of production may rise due to an increase in the prices of raw materials, wages, etc. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Inflation occurs due to the emergence of excess demand for goods and services relative to their supply of output. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. By the term general, we mean if the price of one good has gone up it is not inflation, it is inflation only if the prices of most goods have gone up. Fiscal policy and monetary measures to control inflation. For any economy, inflation is a complex phenomenon. Inflation is a general increase in the overall price level of the goods and services in the economy. While moderate inflation is usually good for an economy, if it goes beyond it, then it can cause a disastrous situation for the economy. A moderate rate of inflation is considered desirable for the economy, and it varies from country to country and from time to time. Inflation is a terms which refers to the persistent upward movement of the general price level. Mkhkin the problem of inflation has been of central concern to american poli cymakers since the mid 1960s.
To control inflation, the fed must use contractionary monetary policy to slow economic growth. May 05, 2016 please watch the introduction to inflation before watching this tutorial. Inflation of this rate is a warning signal for the government to control it before it turns into running inflation. Core consumer inflation focuses on the underlying and persistent trends in. Inflation has a stubborn, selfsustaining momentum, not susceptible to cure by conventional measures of monetary and fiscal restraint.
A situation of extremely rapid inflation reaching 100% per year or more, often resulting from a condition of economic or political breakdown. A new inflation index is proposed for south africa to reduce the negative impact of capital. A process whereby the average price level in an economy increases over time. For example, controlling inflation through wage and price controls can cause a recession. The most common type of core inflation measures excludes items that tend to go up and down in price dramatically or often, like food and energy items. Please watch the introduction to inflation before watching this tutorial. Causes of inflation demandpull inflation arises when aggregate demand in an economy outpaces aggregate supply it involves inflation rising as real gross domestic product rises and unemployment falls. Inflation is a sustained rise in the general level of prices of goods and. The most appropriate way to control inflation in the short term is for the government and the central bank to keep control of aggregate demand to a level consistent with our productive capacity ad is probably better controlled through the use of monetary policy rather than an overreliance on using fiscal policy as an instrument of demand. Often trade unions are blamed for wage rise since wage rate is not completely market. The simplest definition is inflation is a rise in the general level of prices. The main policy used is monetary policy changing interest rates.
Example of calculating inflation from weights and price changes. Deflation meaning, reasons of deflation, measures to control deflation. Therefore, the inflation must be kept under control. There are many ways of controlling inflation in an economy. This study determines the effectiveness of monetary policy in controlling inflation in kenya. Inflation accounting and control through monetary policy measures in nigeria. Inflation, competition, estimation and panel data analysis. Fiscal policy is one of the two main macroeconomic policies used to control aggregate demand and thereby achieve economic stability.
There are other reasons as well for a cautious approach. Monetary policy is one of the most commonly used measures taken by the government to control inflation. The government of a country takes several measures and formulates policies to control economic activities. Inflation in an economy may arise from the overall increase in the cost of production. Inflation is modeled as an unobserved factor affecting the components of an. This type of inflation is known as costpush inflation henceforth cpi. In my previous post i have discussed a few lines about inflation.
According to this view, the control of inflation rests with the federal reserve fed and depends upon its willingness to limit the growth in the money supply. It uses secondary data on inflation, exchange rate, treasury bill rate, money supply, gdp growth, oil prices and world food prices. Types of inflation from the quantitative point of view creeping inflation the rate of inflation doesnt exceed the rate of production growth, creeping inflation is inflation the rate of inflation exceeds the rate of production growth, galloping inflation is from 10% to 100%. The causes of inflation federal reserve bank of kansas city. As discussed above, currently, in may 2010, the wpi inflation is above 10%. B do not reward a fall in the rate of inflation which simply means that. Effectiveness of monetary policy in controlling inflation in. Fiscal measures relate to taxation, government expenditure and public debt management, which seek to influence the level of aggregate demand in an economy. This is commonly described as too much money chasing too few goods. As a result, the producers mark higher prices for the goods and overall rise of price of various goods. These measures attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary rise in prices is due to an excess of. What is inflation, measurement, types and effects of.
When the inflation is till 9% it is known as walking inflation. Crow as presenter for this session of the symposium i see my task as more to indicate than to prescribe. Measures to control inflation there are many ways of controlling inflation in an economy. This note focusses on key issuesboth conceptual and practical with regard to the measurement of inflation such as the tradeoff between different measures and the incorporation of prices not fully determined by market forces of supply and demand. Following are the monetary measures used to control inflation. We can therefore consider a costofliving index that is. To calculate inflation we multiply the weighting of the good x the new price index and then combine all the new price changes. Economists, politicians, policymakers, and the public all want to know the change in the general price level and if the price level is generally rising or falling. Using cpi from the above calculation and the formula of inflation, we derive inflation rate for each year.
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