What is Inflation
The general increase in the price of goods and services in an economy is termed as inflation. Inflation affects all the sectors of the economy be it suppliers or buyers. It refers to a situation where the consumers end up paying more than what they earn. When the supply cannot match the demand in the economy then it is referred to as inflation.
Generally two types of inflation can occur in an economy. The demand pull inflation and the cost push inflation. Basically the policy makers must understand into what type of inflation the economy is heading to make appropriate policies as to cover it. It is not that these occur one by one, but they can occur simultaneously also. Let’s see in detail what these are:
Demand Pull Inflation: this occurs when the consumers are purchasing goods more which increases the prices; hence the demand for the product also increases. So there must be a policy to curb the consumers by reducing their money, so that they spend less and save more. The government can also be a cause for demand pull inflation to occur, if there are low taxes and if the government is spending extravagantly then demand pull inflation increases. If the central government makes an attempt to increase money flow by printing currencies this may lead to hyperinflation.
Cost push inflation: this is a situation where cost of inputs that goes to manufacturing commodities increases. Inputs like cost of labor, raw materials, rent of land etc, if these costs increase then it is likely that the suppliers would curb their production. This results in less of supply and more of demand in the market. Because of the rise in input prices the suppliers will have increase the unit price of each commodity manufactures, thereby it reduces the gross domestic product. This finally increases the rate of inflation in the economy.
The supply of money plays a very important role; if the reserve bank of India does not control this it may affect the entire economy. The higher the supply of money the higher the rate of inflation. The government must also take care of its public expenditure. Because the higher its public expenditure there is a possibility of increase in the demand and supply of goods. The policy of credit expansion also increases the inflation rate; the government must see that it has a good credit policy in place to keep the rate of inflation manageable.
Hence it is in the hands of the central government as to how they can balance the economy, a few measures which they can adopt can be like quality and quantity on credit control, demonetize the currencies of higher value etc.