Inflation

What is Inflation

Inflation is the percentage increase of the cost of goods and services over time,
consequently, the purchasing power of currency is falling. As prices rise, your money
buys less. That's how inflation reduces your standard of living over time.

The inflation rate is the percent increase or decrease of prices during a specified period.
It's usually over a month or a year. The percentage tells you how quickly prices rose
during the period.
When prices of goods and services are on average rising, inflation is positive. Note that
this does not mean that all prices are rising, or that they are all rising at the same rate.
In fact, if enough prices fall, the average may fall too, resulting in negative inflation,
which is also known as deflation.

How it is measured

Inflation is typically measured as the percentage change in a representative collection of

prices. The most well-known collection is the ‘consumer price index’ (CPI), a measure of
the prices of the goods and services that consumers buy each month. The inflation rate
is typically quoted as the percentage change on the level of prices from the same month
a year ago.

Example on how inflation works in the shops

An inflation rate of 5% per year means that if your shopping costs you $100 today, it
would have cost you about only $95 a year ago. If inflation stays at 5%, the same
basket of shopping will cost you $105 in a year’s time. If inflation stays at 5% for ten
years, this same shopping will cost you $163.

The winners and losers with inflation

Inflation is generally bad news for:

Consumers - because it means the cost of living is rising. This means that money is
losing value, or purchasing power.
Savers - because it means that the value of savings is going down. When inflation is
high, savings will buy less in the future.
It’s good news for:
 Borrowers – because it means that the value of debt is being reduced. The higher the
inflation rate, the smaller the burden that future interest payments will place on borrowers’
future spending power.

Causes & Effects of Inflation

Causes of Inflation:
The National Debt
Exchange Rates

Inflation is caused by excess demand or decline in aggregate supply or output. Before

describing the factors, which lead to a rise in aggregate demand and a decline in
aggregate supply, we like to explain “demand-pull” and “cost-push” theories of inflation.

(i) Demand-Pull Inflation Theory:

There are two theoretical approaches to the DPI—one is classical and other is the
Keynesian.

According to classical economists or monetarists, inflation is caused by an increase in

money supply which leads to shift in negative sloping aggregate demand curve. Given a
situation of full employment, classicists maintained that a change in money supply brings
change in price level.

That is why monetarists argue that inflation is always and everywhere a monetary
phenomenon. Keynesians do not find any link between money supply and price level
causing an upward shift in aggregate demand.
According to Keynesians, aggregate demand may rise due to a rise in consumer demand
or investment demand or government expenditure or net exports or the combination of
these four components of aggregate demand. Given full employment, such increase in
aggregate demand leads to an upward pressure in prices. Such a situation is called DPI.
This can be explained graphically.
Just like the price of a commodity, the level of prices is determined by the interaction of
aggregate demand and aggregate supply. In Fig. 4.3, aggregate demand curve is
negative sloping while aggregate supply curve before the full employment stage is
positive sloping and becomes vertical after the full employment stage is reached. AD1 is
the initial aggregate demand curve that intersects the aggregate supply curve AS at point
E1.
The price level, thus, determined is OP1. As aggregate demand curve shifts to AD2, price
level rises to OP2. Thus, an increase in aggregate demand at the full employment stage
leads to an increase in price level only, rather than the level of output. However, how
much price level will rise following an increase in aggregate demand depends on the
slope of the AS curve.

Causes of Demand-Pull Inflation:

DPI originates in the monetary sector. Monetarists’ argument that “only money matters”
is based on the assumption that at or near full employment excessive money supply will
increase aggregate demand and will, thus, cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This
enables people to hold excess cash balances. Spending of excess cash balances by
them caused price level to rise. Price level will continue to rise until aggregate demand
equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector.
Aggregate demand may rise if there is an increase in consumption expenditure following
a tax cut. There may be an increase in business investment or government expenditure.
Government expenditure is inflationary if the needed money is procured by the gov-
ernment by printing additional money.

There are other reasons that may push aggregate demand and so the price level up-
wards. For instance, growth of population stimulates aggregate demand. Higher export
earnings increase the purchasing power of the exporting countries. Additional purchasing
power means additional aggregate demand. Purchasing power and, hence, aggregate
demand may also go up if government repays public debt.

Again, there is a tendency on the part of the holders of black money to spend more on
conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is
caused by a variety of factors.

(ii) Cost-Push Inflation Theory:

In addition to aggregate demand, aggregate supply also generates inflationary process.

As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is
usually associated with non-monetary factors. CPI arises due to the increase in cost of
production. Cost of production may rise due to a rise in cost of raw materials or increase
in wages.

However, wage increase may lead to an increase in productivity of workers. If this hap-
pens, then the AS curve will shift to the right- ward not leftward—direction. We assume
here that productivity does not change in spite of an increase in wages.

Such increases in costs are passed on to consumers by firms by raising the prices of the
products. Rising wages lead to rising costs. Rising costs lead to rising prices. And, rising
prices again prompt trade unions to demand higher wages. Thus, an inflationary wage-
price spiral starts. This causes aggregate supply curve to shift leftward.

This can be demonstrated graphically where AS 1 is the initial aggregate supply curve.
Below the full employment stage this AS curve is positive sloping and at full employment
stage it becomes perfectly inelastic.
Intersection point (E1) of AD1 and AS1 curves determines the price level (OP1). Now there
is a leftward shift of aggregate supply curve to AS2. With no change in aggregate demand,
this causes price level to rise to OP2 and output to fall to OY2. With the reduction in output,
employment in the economy declines or unemployment rises. Further shift in AS curve to
AS3 results in a higher price level (OP3) and a lower volume of aggregate output (OY3).
Thus, CPI may arise even below the full employment (YF) stage.

Causes of Cost-Push Inflation:

It is the cost factors that pull the prices upward. One of the important causes of price rise
is the rise in price of raw materials. For instance, by an administrative order the govern-
ment may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at
a higher price. This leads to an upward pressure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of
petrol compels the government to increase the price of petrol and diesel. These two
important raw materials are needed by every sector, especially the transport sector. As a
result, transport costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions
demand higher money wages as a compensation against inflationary price rise. If in-
crease in money wages exceeds labor productivity, aggregate supply will shift upward
and leftward. Firms often exercise power by pushing prices up independently of consumer
demand to expand their profit margins.

Fiscal policy changes, such as increase in tax rates also leads to an upward pressure in
cost of production. For instance, an overall increase in excise tax of mass consumption
goods is definitely inflationary. That is why government is then accused of causing
inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, gradual
exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause
aggregate output to decline. In the midst of this output reduction, artificial scarcity of any
goods created by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons.
Thus, inflation is caused by the interplay of various factors. A particular factor cannot be
held responsible for any inflationary price rise.

Effects of Inflation:

People’s desire is inconsistent. When they act as buyers they want prices of goods and
services to remain stable but as sellers they expect the prices of goods and services
should go up.

When price level goes up, there is both a gainer and a loser. To evaluate the consequence
of inflation, one must identify the nature of inflation which may be anticipated and
unanticipated. If inflation is anticipated, people can adjust with the new situation and costs
of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make mistakes
in predicting the course of inflation. In other words, inflation may be unanticipated when
people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad headings:

(a) Effect on distribution of income and wealth.

(b) Effect on economic growth.

(a) Effects of Inflation on Distribution of Income and Wealth:

During inflation, usually people experience rise in incomes. But some people gain during
inflation at the expense of others. Some individuals gain because their money incomes
rise more rapidly than the prices and some lose because prices rise more rapidly than
their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following

categories of people are affected by inflation differently:

(i) Creditors and debtors:

Borrowers gain and lenders lose during inflation. When debts are repaid their real value
declines by the price level increase and, hence, creditors lose.

(ii) Bond and bondholders:

In an economy, there are some people who live on interest income—they suffer most.
Bondholders earn fixed interest income: These people suffer a reduction in real income
when prices rise. In other words, the value of one’s savings decline if the interest rate falls
short of inflation rate. Similarly, beneficiaries from life insurance programs are also hit
badly by inflation since real value of savings decline.

(iii) Investors:

People who put their money in shares during inflation are expected to gain since the
possibility of earning of business profit brightens. Higher profit induces owners of firm to
distribute profit among investors or shareholders.

(iv) Salaried people and wage-earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker
succeeds in raising wage rates of white-collar workers as compensation against price
rise. But wage rate changes with a long time lag. In other words, wage rate increases
always lag behind price increases. Naturally, inflation results in a reduction in real
purchasing power of fixed income-earners.

(v) Profit-earners, speculators and black marketers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation.
Seeing inflation, businessmen raise the prices of their products. This results in a bigger
profit. Profit margin, however, may not be high when the rate of inflation climbs to a high
level.

However, speculators dealing in business in essential commodities usually stand to gain

by inflation. Black marketers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich becomes
richer and poor becomes poorer during inflation.

(b) Effect on Production and Economic Growth:

Inflation may or may not result in higher output. Below the full employment stage, inflation
has a favorable effect on production. In general, profit is a rising function of the price level.
An inflationary situation gives an incentive to businessmen to raise prices of their products
so as to earn higher volume of profit. Rising price and rising profit encourage firms to
make larger investments.

As a result, the multiplier effect of investment will come into operation resulting in a higher
national output. However, such a favorable effect of inflation will be temporary if wages
and production costs rise very rapidly.

Further, inflationary situation may be associated with the fall in output, particularly if
inflation is of the cost-push variety. Thus, there is no strict relationship between prices
and output. An increase in aggregate demand will increase both prices and output, but a
supply shock will raise prices and lower output.

Inflation may also lower down further production levels. It is commonly assumed that if
inflationary tendencies nurtured by experienced inflation persist in future, people will now
save less and consume more. Rising saving propensities will result in lower further
outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business
community, particularly when the rate of inflation fluctuates. In the midst of rising infla-
tionary trend, firms cannot accurately estimate their costs and revenues. That is, in a
situation of unanticipated inflation, a great deal of risk element exists.
 It is because of uncertainty of expected inflation; investors become reluctant to invest in
their business and to make long-term commitments. Under the circumstance, business
firms may be deterred in investing. This will adversely affect the growth performance of
the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation has an
encouraging effect on national output. But it is difficult to make the price rise of a creeping
variety. High rate of inflation acts as a disincentive to long run economic growth. The way
the hyperinflation affects economic growth is summed up here. We know that hyper-
inflation discourages savings.

A fall in savings means a lower rate of capital formation. A low rate of capital formation
hinders economic growth. Further, during excessive price rise, there occurs an increase
in unproductive investment in real estate, gold, jewelry, etc. Above all, speculative
businesses flourish during inflation resulting in artificial scarcities and, hence, further rise
in prices.

Types of Inflation

This article briefly explains different types of inflation in economics with examples,
wherever necessary. It is also supplemented with a hierarchical diagram to help readers
summarize and quickly assimilate their list.
Here are different types of inflation depicted and listed below.

The list is as follows:

1. Coverage or scope:
a. Comprehensive or Economy-Wide Inflation, and
b. Sporadic Inflation.
2. Time of occurrence:
a. War-Time Inflation,
b. Post-War Inflation, and
c. Peace-Time Inflation.
3. Government's reaction or control:
 a. Open Inflation, and
b. Suppressed or Repressed Inflation.
4. Rising prices:
a. Creeping, Mild or Low Inflation,
b. Chronic or Secular Inflation,
c. Walking or Trotting Inflation,
d. Moderate Inflation,
e. Running Inflation,
f. Galloping or Jumping Inflation, and
g. Hyperinflation.
5. Different causes:
a. Deficit Inflation,
b. Credit Inflation,
c. Scarcity Inflation,
d. Profit Inflation,
e. Pricing Power, Administered Price or Oligopolistic Inflation,
f. Tax Inflation,
g. Wage Inflation,
h. Build-In Inflation,
i. Development Inflation,
j. Fiscal Inflation,
k. Population Inflation,
l. Foreign Trade Induced Inflation:
i. Export-Boom Inflation, and
ii. Import Price-Hike Inflation.
m. Export-Boom Inflation,
n. Import Price-Hike Inflation,
o. Sectoral Inflation,
p. Demand-Pull or Excess Demand Inflation, and
q. Cost-Push (Supply-side) Inflation.
6. Expectation or predictability:
a. Anticipated or Expected Inflation, and
b. Unanticipated or Unexpected Inflation.
Now let's discuss each type of inflation one by one.
 The types of inflation based on coverage or scope:

Image credits © Gaurav Akrani.

1. Comprehensive Inflation: When the prices of all commodities rise in the entire
economy, it is known as Comprehensive Inflation. Economy-Wide Inflation is its
another name.
2. Sporadic Inflation: Time when prices of only a few commodities in some regions
(areas) rise, it is called Sporadic Inflation. It is sectional in nature. For example,
increase in food prices due to bad monsoon (winds that bring seasonal rains in India).
The types of inflation based on the time or period of occurrence:

1. War-Time Inflation: Inflation that takes place during the period of a warlike situation
is Wartime Inflation. During war, scant productive resources are all diverted and
prioritized to manufacture military goods and equipments. Overall it results in very
limited supply and extreme shortage (low availability) of resources (raw materials) to
produce essential commodities. Production and supply of needed goods slow down
and can no longer meet the soaring demand from people. Consequently, prices of
necessary goods keep on rising in the market, resulting in Wartime Inflation.
2. Post-War Inflation: Inflation that takes place soon after a war is a Post-War Inflation.
After the war, government controls are relaxed, resulting in a faster hike in prices than
what experienced during the war.
3. Peace-Time Inflation: When prices rise during the peace period, it is known as
Peacetime Inflation. It is due to enormous government expenditure or spending on
capital projects of a long gestation (development) time.
The types of inflation based on the government's reaction or its degree of control:

1. Open Inflation: When government does not attempt to restrict inflation, it is known as
an Open Inflation. In a free-market economy, where prices are allowed to take its
course, Open Inflation occurs.
2. Suppressed Inflation: When government prevents the price rise through price
controls, rationing, etc., it is known as Suppressed Inflation. Repressed Inflation is its
another name. However, when government removes its controls, it becomes Open
Inflation. It then leads to corruption, black marketing, artificial scarcity, etc.
The types of inflation based on the rising prices:
1. Creeping Inflation: When prices are gently rising, it is referred as Creeping Inflation.
It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation.
According to R.P. Kent, when prices rise by not more than (i.e. Up to) 3% per annum
(year), it is called Creeping Inflation.
2. Chronic Inflation: If creeping inflation persists (continues to increase) for a longer
period, then it is often called as Chronic or Secular Inflation. Chronic-Creeping
Inflation can be either Continuous (which remains consistent without any downward
movement) or Intermittent (which occurs at regular intervals). It is named chronic
because if an inflation rate continues to grow for a longer period without any
downturn, then it possibly leads to Hyperinflation.
3. Walking Inflation: When the rate of rising prices is more than the Creeping Inflation,
it is known as Walking Inflation. Trotting Inflation is its another name. When prices
rise by more than 3%, but less than 10% per annum (i.e., between 3%, and 10% per
annum), it is called as Walking Inflation. According to some economists, we must take
Walking Inflation seriously as it gives a cautionary signal for the occurrence of
Running inflation. Furthermore, if, not checked in due time, it can eventually result in
Galloping Inflation.
4. Moderate Inflation: Prof. Samuelson clubbed together concept of Creeping and
Walking inflation into Moderate Inflation. It happens when prices rise by less than
10% per annum (single digit inflation rate). According to him, it is a stable inflation and
not a serious economic problem.
5. Running Inflation: A rapid acceleration in the rate of rising prices is called Running
Inflation. It occurs when prices rise by more than 10% in a year. Though economists
have not suggested a fixed range for measuring running inflation, we may consider a
price increase between 10% to 20% per annum (double-digit inflation rate) as a
Running Inflation.
6. Galloping Inflation: According to Prof. Samuelson, if prices rise by dual or triple digit
inflation rates like 30% or 400% or 999% yearly, then the situation can be termed as
Galloping Inflation. When prices rise by more than 20%, but less than 1000% per
annum (i.e. Between 20% to 1000% per annum), Galloping Inflation occurs. Jumping
Inflation is its another name. India has been witnessing it from second five-year plan
period.
7. Hyperinflation refers to a situation where the prices rise at an alarming high rate.
The prices rise so fast that it becomes very difficult to measure its magnitude.
However, in quantitative terms, when prices rise above 1000% per annum (quadruple
or four-digit inflation rate), it is termed as Hyperinflation. During a worst-case scenario
of hyperinflation, the value of the national currency (money) of an affected country
reduces almost to zero. Paper money becomes worthless, and people start trading
either in gold and silver or sometimes even use the old barter system of commerce.
Two worst examples of hyperinflation recorded in the world history are of those
experienced by Hungary in the year 1946 and Zimbabwe during 2004-2009 under
Robert Mugabe's regime.
Following is a conceptual graph on Creeping, Walking, Running, Galloping,
Hyperinflation, and Moderate Inflation.
 In the above figure,
1. X-axis represents the time in years or annum.
2. Y-axis implies percentage (%) increase or rise in price.
3. OA is a Creeping Inflation from 0 to 3%.
4. AB is a Walking Inflation from 3 to 10%.
5. BC is a Running Inflation from 10 to 20%.
6. CD is a Galloping Inflation from 20 to 1000%.
7. DE is a Hyperinflation from 1000% and above.
8. OB is an addition of OA and AB. It is a Moderate Inflation.
Note: Graph is not drawn to scale. It is roughly made only to get an understanding of how
the actual figure will appear if plotted to scale.
The types of inflation based on different or miscellaneous causes:

1. Deficit Inflation takes place due to deficit financing.

2. Credit Inflation occurs due to excessive bank credit or the money supply in the
economy.
3. Scarcity Inflation occurs due to hoarding. Hoarding is an excess accumulation of
necessary commodities by unscrupulous traders and black marketers. It is practiced
to create an artificial shortage of essential goods like food grains, kerosene, etc. With
an intention to sell them only at higher prices to make huge profits during Scarcity
Inflation. Though hoarding is an unfair trade practice and a punishable criminal
offense still, some crooked merchants often get themselves engaged in it.
4. Profit Inflation: When entrepreneurs are interested in boosting their profit margins,
prices rise.
5. Pricing Power Inflation: Usually, it is referred as Administered Price Inflation. It
occurs when industries and business houses increase the price of their goods and
services with an objective to boost their profit margins. It does not occur during a
financial crisis and economic depression, and not seen when there is a downturn in
the economy. As Oligopolies have an ability to set prices of their goods and services,
it is also called as an Oligopolistic Inflation.
6. Tax Inflation: Due to the rising indirect taxes, sellers charge high price to the
consumers.
7. Wage Inflation: If the rise in wages in not accompanied by an increase in output,
prices rise.
8. Build-In Inflation: Vicious cycle of Build-In Inflation gets induced by adaptive
expectations of workers or employees who try to keep their wages or salaries high in
anticipation of inflation. Employers and Organizations raise the prices of their
respective goods and services in anticipation of the workers or employees' demands.
This overall forms a vicious cycle of rising wages followed by an increase in general
prices of commodities. If this cycle continues, then it keeps on accumulating inflation
at each round turn and thereby results in a Build-In Inflation.
9. Development Inflation: During the process of the development of an economy,
income increases, causing an increase in demand and rise in prices.
10. Fiscal Inflation: It occurs due to excess government expenditure or spending when
there is a budget deficit.
11. Population Inflation: Prices rise due to a rapid increase in population.
12. Foreign Trade Induced Inflation: It has two categories, viz.,
a. Export-Boom Inflation, and
b. Import Price-Hike Inflation.
13. Export-Boom Inflation: Considerable increase in exports may cause a shortage at
home (within exporting country) and results in price rise (within exporting country).
14. Import Price-Hike Inflation: If a country imports goods from a foreign country and
the prices of these goods increases due to inflation abroad, then the prices of
domestic products using imported goods also rise. For example, India imports oil from
Iran at $100 per barrel. Oil prices in the international market suddenly increase to
$150 per barrel. Now India to continue its oil imports from Iran has to pay $50 more
per barrel to get the same amount of crude oil. When the imported expensive oil
reaches India, the Indian consumers also have to pay more and bear the economic
burden. Manufacturing and transportation costs also increase due to hike in oil prices.
 It consequently, results in a rise in the prices of domestic goods being manufactured
and transported. It is the end-consumer in India, who finally pays and experiences the
ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international market
fall, then the Import Price-Hike Inflation also slows down, and vice-versa.
15. Sectoral Inflation: It occurs when there is a rise in the prices of goods and services
produced by certain sectors of the industries. For instance, if prices of the crude oil
increase, then it will also affect all other sectors or areas (like aviation, road
transportation, etc.) which are directly dependent on the oil industry. For example, if
oil prices hike, air ticket fares and road transportation cost will increase.
16. Demand-Pull Inflation: Inflation, which arises due to various factors like rising
income, exploding population, etc., leads to aggregate demand and exceeds
aggregated supply, and tends to raise prices of goods and services. Excess Demand
Inflation is its another name.
17. Cost-Push Inflation: When prices rise due to the growing cost of production of goods
and services, it is known as Cost-Push (Supply-side) Inflation. For example, if the
wages of workers get raised, then the unit cost of production also increases. As a
result, the prices of end products and services being manufactured and supplied are
consequently, hiked.
The types of inflation based on the expectation or predictability:

1. Anticipated Inflation: If the rate of inflation corresponds to what the majority of

people are either expecting or predicting, then is called Anticipated Inflation. Expected
Inflation is its another name.
2. Unanticipated Inflation: If the rate of inflation corresponds to what the majority of
people are neither anticipating nor predicting, then is called Unanticipated Inflation.
Unexpected Inflation is its another name.

The important measures to control inflation are as follows:

Inflation is caused by the failure of aggregate supply to equal the increase in aggregate
demand. Inflation can, therefore, be controlled by increasing the supplies of goods and
services and reducing money incomes in order to control aggregate demand.
The various methods are usually grouped under three heads: monetary measures,
fiscal measures and other measures.

1. Monetary Measures:
Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the important monetary measures is monetary policy. The central bank of the
country adopts a number of methods to control the quantity and quality of credit. For this
purpose, it raises the bank rates, sells securities in the open market, raises the reserve
ratio, and adopts a number of selective credit control measures, such as raising margin
requirements and regulating consumer credit. Monetary policy may not be effective in
controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be
helpful in controlling inflation due to demand-pull factors.

(b) Demonetisation of Currency:

However, one of the monetary measures is to demonetise currency of higher
denominations. Such a measures is usually adopted when there is abundance of black
money in the country.

(c) Issue of New Currency:

The most extreme monetary measure is the issue of new currency in place of the old
currency. Under this system, one new note is exchanged for a number of notes of the
old currency. The value of bank deposits is also fixed accordingly. Such a measure is
adopted when there is an excessive issue of notes and there is hyperinflation in the
country. It is a very effective measure. But is inequitable for its hurts the small
depositors the most.

2. Fiscal Measures:
Monetary policy alone is incapable of controlling inflation. It should, therefore, be
supplemented by fiscal measures. Fiscal measures are highly effective for controlling
government expenditure, personal consumption expenditure, and private and public
investment.

The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure:

The government should reduce unnecessary expenditure on non-development activities
in order to curb inflation. This will also put a check on private expenditure which is
dependent upon government demand for goods and services. But it is not easy to cut
government expenditure. Though this measure is always welcome but it becomes
difficult to distinguish between essential and non-essential expenditure. Therefore, this
measure should be supplemented by taxation.
(b) Increase in Taxes:
To cut personal consumption expenditure, the rates of personal, corporate and
commodity taxes should be raised and even new taxes should be levied, but the rates
of taxes should not be so high as to discourage saving, investment and production.
Rather, the tax system should provide larger incentives to those who save, invest and
produce more.

Further, to bring more revenue into the tax-net, the government should penalise the tax
evaders by imposing heavy fines. Such measures are bound to be effective in
controlling inflation. To increase the supply of goods within the country, the government
should reduce import duties and increase export duties.

(c) Increase in Savings:

Another measure is to increase savings on the part of the people. This will tend to
reduce disposable income with the people, and hence personal consumption
expenditure. But due to the rising cost of living, people are not in a position to save
much voluntarily.

Keynes, therefore, advocated compulsory savings or what he called ‘deferred payment’

where the saver gets his money back after some years. For this purpose, the
government should float public loans carrying high rates of interest, start saving
schemes with prize money, or lottery for long periods, etc. It should also introduce
compulsory provident fund, provident fund-cum-pension schemes, etc. All such
measures increase savings and are likely to be effective in controlling inflation.

(d) Surplus Budgets:

An important measure is to adopt anti-inflationary budgetary policy. For this purpose,
the government should give up deficit financing and instead have surplus budgets. It
means collecting more in revenues and spending less.

(e) Public Debt:

At the same time, it should stop repayment of public debt and postpone it to some future
date till inflationary pressures are controlled within the economy. Instead, the
government should borrow more to reduce money supply with the public.

Like monetary measures, fiscal measures alone cannot help in controlling inflation.
They should be supplemented by monetary, non-monetary and non-fiscal measures.

3. Other Measures:
The other types of measures are those which aim at increasing aggregate supply and
reducing aggregate demand directly.

(a) To Increase Production:

The following measures should be adopted to increase production:
(i) One of the foremost measures to control inflation is to increase the production of
essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.
(ii) If there is need, raw materials for such products may be imported on preferential
basis to increase the production of essential commodities,

(iii) Efforts should also be made to increase productivity. For this purpose, industrial
peace should be maintained through agreements with trade unions, binding them not to
resort to strikes for some time,

(iv) The policy of rationalisation of industries should be adopted as a long-term

measure. Rationalisation increases productivity and production of industries through the
use of brain, brawn and bullion,

(v) All possible help in the form of latest technology, raw materials, financial help,
subsidies, etc. should be provided to different consumer goods sectors to increase
production.

(b) Rational Wage Policy:

Another important measure is to adopt a rational wage and income policy. Under
hyperinflation, there is a wage-price spiral. To control this, the government should
freeze wages, incomes, profits, dividends, bonus, etc.

But such a drastic measure can only be adopted for a short period as it is likely to
antagonise both workers and industrialists. Therefore, the best course is to link increase
in wages to increase in productivity. This will have a dual effect. It will control wages and
at the same time increase productivity, and hence raise production of goods in the
economy.

(c) Price Control:

Price control and rationing is another measure of direct control to check inflation. Price
control means fixing an upper limit for the prices of essential consumer goods. They are
the maximum prices fixed by law and anybody charging more than these prices is
punished by law. But it is difficult to administer price control.

(d) Rationing:
Rationing aims at distributing consumption of scarce goods so as to make them
available to a large number of consumers. It is applied to essential consumer goods
such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of
necessaries and assure distributive justice. But it is very inconvenient for consumers
because it leads to queues, artificial shortages, corruption and black marketing. Keynes
did not favour rationing for it “involves a great deal of waste, both of resources and of
employment.”
Conclusion (Egypt’s)

While controls and the monetary measures enumerated above, have gone a long way
to check inflation they alone are not sufficient. Inflationary tendency has to be fought on
the production front. Although deficit financing increases the risks of inflation in
economy for the time being, it would tend to check inflation in the long run when the
investment would begin to yield results. While on one side money in circulation would
be withdrawn by higher taxation and in the form of savings, greater production in
agriculture and industrial spheres would place more commodities in the market to be
purchased for the same amount of money

Presented by: (Names of the participants in the group)

Under the supervision of: (Name of the dr.)

What’s left is choosing which types of inflation actually in Egypt and deciding on our
recommendation (only in theory) … sorry for the delay and please give me your feed back
Salma.