One of the various macroeconomic phenomena which has the capacity to damage the economy is INFLATION. Inflation is majority of the times a result of the increasing growth of an economy at a high rate more than its potential growth.
According to Paul Samuelson , ” Inflation is the rise in the general level of prices.”
For any growing economy, inflation hits hard. The aggregate demand is always higher than the aggregate supply during this period. Either the prices are raised as a result of increase in cost of production or due to profit push motives. Initially it might be profitable to the businesses, but eventually, due to decreased savings and decreased spendings by the consumers( due to high prices), the entrepreneurs also suffer. Inflation decreases the flow of income in the economy as well. But, this happens only when it is not accompanied by rise in nominal wages. One thing that is beneficial is that the unemployment level decreases.
Many a times, the low level income groups face a big problem, especially, when the prices of inelastic goods rise. For example, the growth rate of India is 7.6%, more than all the world economies. As a consequence, we face the problem of inflation. Though the high income groups are not hit hard, it is the middle and low income groups who face the problem. When the prices of basic commodities – Urad dal, onions- rose, people took to streets.
Therefore, there it not only effects the economy, but it causes a stir in the society. It needs to checked and stopped.
The following are some ways the governments have been using to curb inflation-
1) Increase in imports
The import of the goods that are in deficit reduces inflation. It will be more beneficial to import cheaper goods or substitute goods. But too much of imports can also lead to current account deficit.
2) Reduction of indirect taxes
One of the primary reasons of inflation is increase in cost of production. Therefore, if the government reduces the indirect taxes, the cost comes down and the prices are likely to decrease as well. One more thing that can be done to cut it at the grassroot level
, i.e, to reduce the cost of production, is by reducing the dependence of capital equipment from the other countries. Domestic markets play a role here.
3) Government subsidies
The government can further increase the subsidies, especially on the necessary goods. This would help reduce the burden of high prices on the low level income households.
4) Maintaining the growth rate closer to the level of potential growth rate
The governments have to identify their potential growth rates. Growth rate above the its potential leads to inflation whereas a lesser growth rate leads to deflation. This will be achieved by intensive study on various factors that cause growth.
5) Flexible interest rates
This would help in curbing inflation indirectly. When the interest rates are comparatively low, the producers will seek to borrow from the financial institutions. This will help their working capital. But, lowering the interest rates could sometimes have a drastic effect too, which could lead to a turmoil in the economy.