MEASUREMENT OF INFLATION

The following are the methods used to calculate inflation.

STATE OF INFLATION

This is the speed at which the general price level is increasing in the economy and its categorized according to different types of inflation and includes the following;

1.     Creeping/ mild inflation

This refers to an increase in the general/ average price level at a slow rate usually less than 10% per annum. This state of inflation is desirable.

2.     Moderate/ running inflation

This is one whereby the persistent increase in the general price level proceeds at a high rate usually above 10% per annum. Such inflation adversely/ negatively affects the poor and the middle class groups hence it requires strong monetary and fiscal policies or else it leads to hyper inflation.

3.     Hyper/ galloping/ runaway inflation

This refers to inflation where the general price level increases at a very high rate, the increase taking place within hours, days or weeks and the percentage point increase per annum is over 20%.

THEORIES OF INFLATION

There are many theories of inflation and these include;

♫     Cost push inflation

♫     Demand pull inflation

♫     Structural inflation

♫     Imported inflation

♫     Monetarist inflation

♫     Speculative inflation

♫     Wage – wage inflation

♫     Wage – price inflation

♫     Price – wage inflation

COST PUSH INFLATION

This refers to a persistent increase in the general/ average price level due to rising cost of production.

Causes of cost push inflation

♫     Rising costs of raw materials

♫     Rising wages and salaries

♫     Rising costs of energy/ fuel

♫     Rising rates of rent

♫     Rising costs of borrowing

♫     Rising rates of indirect taxes

♫     Rising transport costs

♫     Rising costs of improving working conditions due to trade union pressure.

Solutions to cost push inflation

♫     Reduce bank rate/ lending rates by the central bank.

♫     Improving infrastructures like roads to reduce on transport costs

♫     Reducing indirect taxes

♫     Offering subsidies to producers to reduce the cost of production.

♫     Wage control measures/ controlled trade union influence

DEMAND PULL INFLATION

This refers to a persistent increase in the general/ average price level due to aggregate demand being greater than aggregate supply at full employment situation of national income/ resources.

Causes of demand pull inflation

♫     Increase in wage levels hence increased purchasing power

♫     Increase in population size

♫     Excessive issuance of currency which increases aggregate demand in the economy without corresponding increase in output.

♫     Reduced importation of essential goods that are highly demanded in the local market.

♫     Excessive exportation o f essential goods which reduces domestic supply.

♫     Excessive government supply.

♫     Natural factors/ industrial unrests/ breakdowns which lead to a fall in production levels.

♫     Excessive inflows of income from abroad.

♫     Uncontrolled creation of credit by commercial banks.

♫     Reduced direct taxation which increases purchasing power of the people.

Measures to reduce demand pull inflation

♫     Reduce government expenditure especially on provision of non-essential products.

♫     Increase direct taxes to reduce disposable income.

♫     Control export of essential goods.

♫     Encourage importation of essential goods that are highly demanded in the local market especially from cheaper sources.

♫     Undertake restrictive monetary policy to reduce the amount of money in circulation e.g. increase the bank rate.

♫     Wage control measures/ controlled trade union influence

♫     Control population growth rates.

STRUCTURAL INFLATION

This refers to a persistent increase in the general price level due to supply rigidities and structural bottlenecks in the sectors of the economy leading to a decline in the supply of essential goods.

OR

Is one caused by supply rigidities in the economy.

Causes of bottleneck inflation

♫     Breakdown of infrastructures such as bridges, roads causing difficulty in transporting commodities form areas of plenty to areas of scarcity.

♫     Natural calamities/ hazards such as floods, droughts, etc causing drastic reduction in supply of agricultural commodities.

♫     Political instabilities. These discourage productive activities causing shortage of goods and services leading to increase in prices.

♫     Scarcity/ exhaustion of raw-materials/ inputs.

♫     Breakdown of major industries hence causing shortage of goods in the economy leading to increase in prices.

♫     Shortage of foreign exchange.

♫     Speculation by businessmen.

♫     Hoarding of goods by traders.

Solutions to structural inflation

♫     Improve infrastructures e.g. roads

♫     Improve political climate

♫     Agricultural modernization to reduce dependence on nature e.g. undertaking irrigation to overcome the problems of natural calamities like drought.

♫     Importation of raw-materials/ inputs from other countries hence ensuring continued production thereby overcoming problems of scarcity of goods.

♫     Encourage private, local and foreign investors/ further liberalization of the economy.

♫     Rehabilitation and establishment of industries.

♫     Diversification of production.

IMPORTED INFLATION

Is one where the persistent increase in the general price level is as a result of a country importing from another country prone to inflation/ experiencing inflation leading to price increment in the domestic economy.

Possible solutions

♫     Encourage importation from cheaper and friendly sources.

♫     Reducing on import tariffs and subsidizing importers of essential goods.

♫     Undertake import substitution industrial strategy to produce goods that were formerly imported.

MONETARIST INFLATION

This is one whereby persistent increase in the general price level is due to excessive money supply in the economy without corresponding increase in the value of output.

SPECULATIVE INFLATION

This is one which arises due to anticipation of future increase in prices that eventually leads to increase in demand forcing the producers to increase prices of goods and services.

WAGE – WAGE INFLATION

This occurs due to inter-sectoral comparisons among workers whereby workers with the same type of employment demand for a high wage when workers in similar occupations are also earning a high wage elsewhere forcing the employers to increase prices so as to effect those wages.

WAGE PRICE INFLATION

This is one where workers demand for increased pay without corresponding increase in output forcing employers to increase prices of final goods in order to increase workers’ wages and also maintain their profit margins.

PRICE WAGE INFLATION (INFLATIONARY SPIRAL)

This is one that arises due to continuous increase in prices which increases the cost of living forcing workers to continuously demand for higher wages forcing the employers to increase prices of goods and services so as to increase wages for the workers

OR

This is a situation where the increase in the price level in the economy forces the workers to demand for higher wages leading to increase in the cost of production and thus firms (producers) are forced to increase prices of goods and services which again forces workers to demand for higher wages.