There is no single Measures to control inflation. Measures have to be taken on several fronts. These measures must be taken, keeping in view the main cause of inflation. If cause of inflation is excessive demand then remedy will be different from those measures which are taken to remove cost push inflation. Broadly speaking, the anti-inflationary measures can be divided into three groups.
1- Monetary Measures
Monetary measures are those techniques which are adopted by the central bank to control the supply of money in the economy. Since inflation arises due to excess of aggregate demand, therefore the best remedy for fighting inflation to reduce aggregate demand. Monetary measures are very helpful in reducing aggregate demand by controlling the total supply of money. Monetary measures are as under:-
Bank Rate Policy:-
During inflation central bank should raise the bank rate. As a result of this commercial banks will also enhance the rate of interest. Borrowing will become more costly. People will borrow less money for consumption and investment purposes. Consequently, demand for consumption and investment goods will decrease and inflationary pressure will be reduced.
Open Market Operation:-
Inflation can also be controlled by the sale of securities in the open markets. Purchase of securities by commercial banks reduces their cash reserves and credit creation capacity. A decrease in the supply of credit will check the rise in prices.
Cash Reserve Ratio:-
This instrument also affects the credit creation capacity of commercial banks. Central bank can control inflation by raising the reserve ratio.
Facts You Must know ABOUT Measures To Control Inflation In Economic System
Credit Rationing:-
Central bank may fix the ratio of credit for commercial banks. It will reduce the expansion of credit.
2 Fiscal Measures
These measures are discussed as under.
Government Expenditure:-
Govt. expenditure is a significant part of aggregate. Demand, therefore a cut in govt, expenditure is very effective in reducing inflationary pressure.
Govt. Revenue:-
Govt. can control inflation by reducing private expenditure through increase in direct taxes. On the other hand indirect taxes should be decreased as much as possible.
3 Realistic Measures:
These are following
Output Adjustment:-
At less than full employment, inflation can be controlled by increasing the supply of goods and services. At full employment, it can be controlled through output adjustment i.e., shifting resources from the production of those goods which are no sensitive to inflation to the production of those goods which are highly sensitive to inflation,
Price Control
Artificial and temporary solution for the problem of inflation is to impose price control. In this case government makes administrative measures to fix the prices of necessities. An alternative strategy may be selling of the basic needs of life at cheaper rate in utility stores or in Sunday bazaars etc. to beat the market prices of the essential commodities.
Inflation, the general increase in the price level of goods and services over time, can be detrimental to an economy’s stability and the purchasing power of its currency. Policymakers adopt various measures to control inflation. Here are some of the most common methods:
Measures To Control Inflation
- Monetary Policy Measures:
- Tightening of Monetary Policy: Central banks can increase interest rates, making borrowing more expensive and saving more attractive. This can decrease money supply and consumer spending.
- Open Market Operations (OMO): Central banks can sell government bonds in the open market to soak up excess liquidity, thereby reducing the amount of money in circulation.
- Reserve Requirements: Increasing the reserve requirement for banks will reduce their lending capabilities, decreasing money supply.
- Fiscal Policy Measures:
- Reduction in Government Spending: By cutting its expenditures, the government can reduce the amount of money it injects into the economy.
- Increase in Taxes: Higher taxes can reduce disposable income and consumption, leading to reduced demand pressures.
- Deficit Financing: Governments can refrain from borrowing excessively as it increases money supply and can be inflationary.
- Supply-Side Measures:
- Improving Productivity: Encouraging industries to adopt better technologies can result in higher outputs, increasing the supply of goods.
- Removing Supply Bottlenecks: By addressing infrastructural or bureaucratic bottlenecks, governments can ensure smoother and faster production processes.
- Importing Essential Goods: To bridge the gap between demand and supply, governments can increase imports of essential goods.
- Wage and Price Controls:
- Wage Freeze or Controls: This is a direct intervention to limit the growth of wages which can otherwise lead to cost-push inflation.
- Price Controls: Governments can impose ceilings on prices or monitor them, although this might result in black markets or shortages if maintained for extended periods.
- Exchange Rate Policy:
- Supporting Domestic Currency: By propping up the value of the domestic currency, governments can make imports cheaper and reduce cost-push inflation.
- Capital Controls: Restrictions on the movement of capital can be implemented to prevent speculative attacks and wild fluctuations in the currency.
- Structural and Institutional Measures:
- Agricultural Reforms: Enhancing the agricultural supply chain can lead to more stable food prices.
- Promotion of Competition: By discouraging monopolies and promoting competition, governments can ensure better pricing behavior in markets.