Inflation refers to the phenomenon where there is a sustained increase in the general level of prices of goods and services within an economy. This can lead to a decrease in the purchasing power of a given unit of currency, necessitating greater amounts of money to purchase the same goods or services. Inflation can be driven by many things, including an increase in the money supply, higher production costs, or a decrease in the supply of goods and services. In order to mitigate the negative effects of inflation, central banks and governments may implement policies such as adjusting interest rates, regulating the money supply, or controlling prices. It is important to manage inflation effectively, as high levels of inflation can have detrimental impacts on an economy, including devaluation of savings, increased borrowing costs, and a decrease in investment.
In other words, every passing day, the value of the money we possess decreases. In the past, land and gold were available at comparatively lower prices than what we see today. This reduction in the purchasing power of money is referred to as inflation. Inflation is a common occurrence in all economies, and its rate varies from one country to another. For instance, the inflation rate in the United States is approximately 3% annually. This implies that the value of money depreciates by 3% every year.
Additionally, governments may print money to sustain their country’s economy. However, the increase in the money supply can lead to inflation when more money enters into circulation. For instance, if an individual owns 1000 units of stock for a particular company whose total stock supply is 1 billion, and the company decides to inject another 1 billion units of stock into the market, the value of the stock would decrease. This situation is also considered a type of inflation.
Zimbabwe is an example of a country that experienced hyperinflation, where a loaf of bread would cost 550 million units of their currency. This inflationary situation occurred due to an excessive currency supply in the market. The higher the inflation rate, the greater the likelihood of currency devaluation. In the past, currencies were backed by the value of gold, but nowadays, the gold standard has been removed. Governments may have to print more money during economic recessions to increase employment opportunities.
Here are the two ways to control inflation.
(i) Controlling inflation by controlling the price
Governments often employ the practice of controlling prices to manage inflation in emerging economies. However, inflation can still happen within a managed range. It only becomes a drawback to the economy when prices increase significantly while the earning capacity of individuals remains low. The challenges encountered in the 1980s and 2022 are distinct due to rapid development and high population. As a result, conventional inflation control methods may not be effective in the contemporary world.
(ii) Controlling inflation by creating new policy
Controlling inflation by creating new policies is a common practice in most countries. One such policy is to increase interest rates, which encourages citizens to put their money in banks and reduces the amount of money the government needs to print, ultimately leading to less inflation.
Apart from looking at it from a traditional and historical perspective, the rise in inflation is often attributed to people’s greed. If individuals become more compassionate, helpful, and content with what they have, the value of goods will not increase. The supply, demand, and control of goods all become unstable when people become greedy and start hoarding.
In simple terms, when the supply of money is high in a closed economy, the value of goods increases, and more money is required to buy the same things. It is challenging to have complete control over inflation.