INFLATION
BY MILDRED
INFLATION
• Inflation is the persistent increase in the general price level of goods and services in an
economy in a given period of time.
TYPES OF INFLATION ACCORDING TO THE DEGREE OF CHANGE IN PRICES/ STATE OF
INFLATION:
• State of inflation is the rate/speed/ degree of intensity at which prices increase in an
economy over time.
• The state of inflation is categorized into two;
• 1. Mild /Creeping/Gradual inflation: Mild inflation is one whereby the persistent increase
in the general price level proceeds at a slow rate usually not exceeding 10%.
• 2. Hyper /Run-away/Galloping inflation Hyperinflation is one where the general price level
increases at a very high rate, within hours, days or weeks and the percentage point
increase per annum is over 20%.
CLASSIFICATION OF INFLATION ACCORDING TO
CAUSES:
• DEMAND-PULL INFLATION
• Demand-pull inflation refers to persistent increase in the general price level that arises due to excess
aggregate demand over aggregate supply at full employment level of resources.
• Causes of demand-pull inflation in Uganda:
• Excessive issuance of currency by central bank which is not followed by increase in the level of output.
• Excessive recurrent government expenditure on non productive activities/ventures leading to increased
money supply.
• Excessive inflows of incomes from abroad in the form remittances by nationals living abroad.
• Excessive exportation of essential goods/Increasing demand for our exports.
• Excessive /Uncontrolled credit creation by commercial banks.
• SOLUTIONS TO DEMAND-PULL INFLATION:
• Control wages and incomes of the people (wage freeze).
• Reduction in government expenditure especially on non-productive ventures
• Importation of goods from cheaper sources to supplement domestic output
• Discourage exportation of scarce goods to avoid shortages
• Increase direct taxes in order to reduce people’s incomes.
• Apply restrictive monetary policy i.e. where the government withdraws excessive money in circulation
COST-PUSH INFLATION:
• Cost push inflation refers to persistent increase in the general price level that arises out of increase
in the costs production.
• Causes of cost push inflation in Uganda:
• Increasing/rising costs of raw material of raw materials Increasing/rising wages/salaries
• Increasing/rising cost of transportation for raw materials from high fuel prices
• Increasing/rising level of taxation.
• Increasing/Rising rate of interest on loans.
• Increasing/rising costs of advertising
• WAYS OF CONTROLING COST PUSH INFLATION:
• Provide subsidies to the producers/Reduce taxes charged on producers
• Adopt wage control measures to avoid unnecessary increase in wages
• Control interest rate in order to reduce the cost of borrowing.
• Adopt price control measures by fixing maximum prices
STRUCTURAL /BOTTLENECK / SCARCITY
INFLATION
• Structural inflation refers to persistent increase in the general price level /average price
level due to supply rigidities and structural bottleneck in the sectors of the economy
leading to a decline in the supply of essential goods.
• OR: It is the type of inflation caused by supply rigidities and structural bottlenecks.
• Causes of structural inflation:
• The breakdown of key industry
• Infrastructural break down
• Political instability/political turmoil
• Natural hazards e.g. floods, drought which reduces agricultural output
• Hoarding of goods by producers/traders
• Scarcity of inputs/scarcity of raw materials/limited raw materials
• There is foreign exchange shortages
• Ways of controlling structural inflation:
• Maintain political stability in the country
• Rehabilitate infrastructure
• Undertake modernisation of agriculture
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• Price-Wage inflation. This occurs when an increase in prices of commodities induces workers to demand for
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higher wages. This increases the costs of production and this leads to continuous rise of prices all commodities.
• NB: An inflationary spiral is a situation in which a persistent increase in the prices of goods leads to the demand
for higher wages by the workers causing increased costs of production which results into increased costs of
production which results into increased prices again leading to increase demand for higher wages.
• 4. Wage price inflation. This occurs when the workers through their trade unions demand for higher wages
causing increased costs of production which forces employers to increase prices for their products in order to
maintain their profit margin.
• 5. The wage –wage inflation. This occurs due to inter-sector or inter-industry comparison of wages by workers
i.e. if workers in the similar type of employment are paid higher wages. This makes their counterparts to demand
for an increase in their wages leading to increased production costs and higher prices for the good and services.
• 6. Profit Push inflation. This occurs due to too much desire for higher profits by producers/traders which makes
them put less output on the market hence forcing prices of goods and services to increase.
• IMPORTED INFLATION: This is the persistent increase in the general price level arising from the importation of
commodities from inflation prone countries or countries that are experiencing inflation.
• OR: It is the type of inflation resulting from importation of goods from another country experiencing inflation so
that the high prices of imports result into rising prices of commodities in the domestic market.
• 9. MONETARY INFLATION. This is the type of inflation caused by excessive increase in money supply in the
economy.
• 10. SECTORAL INFLATION: This refers to the rise in prices occurring in different commercial sectors of a
country.
• 11. PRICING POWER INFLATION/ADMINISTERED PRICE INFLATION / OLIGOPOLSTIC INFLATION. This type
of inflation occurs when business entities and industries decide to increase the prices of their respective goods
and services to increase their profit margins.
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• DEFLATION. This refers to persistent decline/fall in the general price
level of goods and services in the economy due to fall in aggregate
demand in an economy.
• REFLATION: This refers to a deliberate government policy which is
undertaken to force prices upwards in order to help an economy to
recover from an economic depression.
• DIS-INFLATION: This refers to policies undertaken by the government to
control inflation rates in the country.
• SUPPRESED INFLATION: This is a situation where demand exceeds
supply but the effect of this on prices is minimised by use of price controls
and rationing of goods.
• HEADLINE INFLATION: This measures changes in the price levels of all
goods in a given country/ region over time.
• UNDERLYING INFLATION: This measures changes in the price levels of
goods excluding the value of foodstuffs in a given country over a given
period of time.
GENERAL CAUSES OF INFLATION IN
• Break-down of infrastructures.
UGANDA.
• Excessive issuance of currency
• Excessive government expenditure.
• Poor political atmosphere/climate.
• Importation of goods from inflation prone countries/ Importation from countries experiencing
inflation
• Rising production costs (e.g. rising prices of raw materials, rising power tariffs, rising interest rate,
rising costs of transport, rising wages).
• Greed for higher profits by traders, leading to profit push inflation.
• Speculation by traders and consumers.
• Unfavourable natural factors/natural
• Excessive exportation of essential goods/ increased demand for exports.
• Excessive/ Increasing inflow of incomes from abroad.
• Depreciation of local currency.
• Excessive/Uncontrolled credit creation by commercial banks.
• Uncontrolled lending of money to the public by commercial banks.
• Excessive borrowing of money from the central bank by the government.
POSITIVE EFFECTS
• It encourages/stimulates effort and hard work
• It is an incentive for investment and production
• Producers tend to increase output in order to earn more profits
• More employment opportunities are created
• . It helps to increase government revenue.
• It encourages/Increases resources utilisation
• The borrowers/debtors gain in real terms.
• It promotes commercialisation/ monetisation of the economy
• It increases the level of output, thus stimulates economic growth
• It encourages labour mobility.
• It increases levels of output/ promoting economic growth
• It helps the economy to recover from an economic depression.
• It promotes forced savings.
NEGATIVE EFFECTS
• It discourages savings.
• It leads to loss of confidence in the country’s currency.
• It worsens the balance of payment problem/ deficit.
• It leads to industrial unrest/strikes.
• It worsens income and wealth inequalities/Worsens income inequalities.
• It discourages local and foreign investors.
• It makes the government unpopular
• It leads to production and consumption of poor quality goods
• It makes planning difficult/distorts planning.
• The fixed income earners lose/suffer greatly as real income reduces.
• Discourages lending as Creditors/Lenders are paid back less in real terms than they lent out.
• It encourages/ promotes malpractices/illegal activities
• People are strained in an attempt to cope with the rising cost of living.
• It leads to brain drain.
MEASURES
• Increase direct taxes on incomes of the people
• Reduce government expenditure on provision of non-essential goods
• Further liberalisation of economy.
• Improve/Develop infrastructural facilities.
• . Further privatisation of state enterprises
• Control issuance of currency.
• Provide investment/tax incentives to the investors
• Use of contractionary / restrictive monetary policy for example through sale of government
securities.
• Improve political climate /Atmosphere.
• Modernisation agriculture
• Reduce indirect taxes on essential goods and services
• Encourage importation from cheaper sources.
• Encourage establishment of import substitution industries.
• Encourage use of instruments of credit for example cheques, promissory notes, bills of exchange and
credit cards.
• Control the exportation of essential goods/certain goods
• Reduce government borrowing from the central bank