Inflation: Causes, Remedies and Control
Inflation – A research study on measures to combat inflation will not be complete without an insight into existing literature. Considerable area and literature abounds in this study area and reviewing, it will help in providing the recital framework in which to base this research. A review of literature is carried out to draw methodologically inspiration, background data and information.
DEFINITION OF INFLATION
According to Webster’s new collegiate dictionary defined inflation as an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general prices and fall in the purchasing power of money –oxford dictionary.
CAUSES OF INFLATION
The causes of inflation are evident from its definition. at the cost of repetition we may remind ourselves that it is essentially excess of demand over supply at current prices and that is a state of struggle and disequilibria. In other worlds, inflation cannot occur, unless there is excess demand, made effective by increases in the money supply or purchasing power. This may occur under the following condition:
A, in the period of wars government may resort to print more money to finance wartime, expenditure.
B, in peacetime, when government engages in deficit financing (that is spending more than it collects from the public through loan and taxes.)
C, if having collected more by loan and taxes, the government spends and projects which do not directly and immediately produce consumer goods. Such projects include road works, construction of dams and airlines.
D, if the community receives more payment for the services of its factors of production than is justifies by productivity in the economy. For instance, if house rents rise sharply, landlords will receive more income . This may simulate building construction, which will pay out more money in wages, which in turn will be used complete for the purchase of the limited available consumer goods, including imports, and this will lead to price increase, a fall in the value of money, a demand for further increase in wages and so on .
E, inflation may also occur because of rising costs. If cost rise, producers will need more money to buy a given volume of factors of production in order to produce the same amount of goods and services. The increase in the volume of money means an increase in the purchasing power. If the sellers of the factors spend the money receive, as they will under normal circumstances, prices will rise. Producers will also turn to recover their cost by increasing the prices of their products maintain profit margins cost may rise as a result of the rising costs of factors product.
F, when loading is being practiced in the distribution system, it leads to a rise in price level.
REMEDIES TO INFLATION IN NIGERIA
1, demand restraint policy must be implemented whereby the level of aggregate expenditure is made to keep peace with the potential ability of the economy to produce goods and services.
2, since the financing of a budget deficit does have implication for the size of the money stock, the monetarists claim that only monetary policy can effectively restrict demand, is baseless. Both the monetary and fiscal authorities should act together to cause deflationary gap wherever the need for it arises.
3, the preceding policy for reducing the pressure of demand could be considered along with the policy of prices and income control. Aimed at reducing the rate of money wage increase. I now turn to government approach to inflation in Nigeria beginning from independence but with particular focus on the period when government consciously formulated policies and implemented measure directed specifically at influencing agricultural and industrial production or aim at these goals indirectly by focusing on the balance of payment or the rate of domestic inflation. It is of course, the rate of domestic inflation that will nominate over analysis and appraisal of government policies and measures. It would be recalled that sources of inflationary pressures stated appearing in Nigeria economy from about 1964 when Morgan salary award was made to junior workers and backdated six months to January 1964. The award and the arrears to be paid together with direct advances of n28.8million made by the central bank of Nigeria to the western Nigeria marketing board expanded money supply and so exercise aggregate demand effects on the economy .in the way, the government encountered a conflict with its anti-inflation policy rising the minimum rediscount rate of the CBN in an attempt to check the growth of loans and advances .
Following this conflict, prices inflation surged forward in 1965, and 1966 more so in the latter year because of political disturbance which ethic erupted them . Measures involving mainly tariff reduction were therefore taken which led to price decline in 1967, and 1968, however the need to improved government revenue position required for fighting the civil war led to fiscal and exchange control measure which once more created a build up of inflation pressure. Indeed by 1969, an inflation rate had appeared that seemed to signal a regine of double-digit inflation rates in 1970s. As government then instituted fiscal, monetary and credit polices to raise fund for the war, converse foreign exchange and curb inflation pressures, the measures tended to yield conflicting result. Once more by increasing money for supply, curtailing the incentive for private investment and heightening imports prices. Consequently, inflation advanced in 1970, and 1971, additional factors making for higher inflation rate in 1970 induced the release of part up war demand, and a high level of government expenditure financed by bank borrowing, while in 1971, it was the payment of final adobe award. By imposing an and specific licensing on consumption goods which restricted their supply, the government also encountered a conflict with it’s anti-inflation objectives. In this way, inflation continued unabated and so fairly widespread anti-inflation any measures were taken in 1972, such measures included fiscal incentive for industries, bulk importation of scare consumer items as a kind of supply management strategy etc.
In 1983 the government decided to restructure the economy so as to ensure self-sustaining growth and developing by pegging the rate of importation, promoting the expansion of domestic outputs, and also reducing the rate of domestic price inflation. Coupled with the various policy measure that already in place, further measure were implement for a vast array of imports, increases duties, up ward adjustment in interest rates in January and April and lowering of same later in November. Government borrowing from the banking system increase appreciably. And tended to have crowded out private investment. These development spare parts and raw materials for the maintenance of industrial machinery and the production of industrial goods led to drastic fall of 12 percent aggregate demand effects, its little wonder that the rate of inflation short up again to a double . Digit figure of 23 percent and it looked as through, government had no option than to acknowledge its battle it had wage against inflation in the Nigeria economy.
Recently, between the month of June, and July of year 2003 government adopted this measure by control too much money in Nigeria by increasing the price of petroleum which led to increase in transportation fame and some other common duties etc.
THE MEASURE USED IN CONTROLLING INFLATION.
I, discouraging commercial banks from indiscriminate lending.
Ii, Raising of the lending rates deregulation of interest rates.
Iii, cutting down the government expenditure and raising taxes.
Iv, importation of essential goods
V, improved distributive net work and direct governments participation in the production and distribution of goods.
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Inflation: Causes, Remedies and Control
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