Inflation is an economic status when the price of goods and services increase and has an effect on the cost and standard of living of the people on the whole. This inflation has many types and causes which require a detailed understanding even by the common people so that they know how to manage at such times of economic distress.
Formulating measures for facing such economic setbacks is taken up by the government and these prove to help the people to balance their cash, savings and spending accordingly. The main policy tools which help in controlling and sustaining inflation are:
- Monetary policy: when there is huge economic growth, the industry cannot meet this quick pace to meet the demand during this time. This puts pressure on people as firms increase their price of the goods at such times as demand is more. Here policies which reduce aggregate demand can be helpful at this time. At this point in time, the central banks should have a higher interest rate of borrowing so it makes more saving than spending by the people which can stabilize the money flow in the economy as a whole.
- Fiscal policy: this is when a higher rate is imposed on taxation policy in a country which will have the lower spending effect and accordingly people can tackle their cost of living at such pressured moments. Reducing aggregate demand and imposing more tax will be a handy solution taken up by the government at such times.
- Wage Control: though this was an old practice in the 1970’s this proved quite effective to control inflationary pressure, a method to control wages. Limiting the wage growth when employee unions bargain for the same can be a method to moderate the inflation effect. This will automatically influence a reduction in cost-push inflation.
- Monetarism: this is a strategy which controls inflation by reducing the money supply, as monetarists judge a strong link between inflation and money supply. Some policies which support this factor are:
- Increased interest rates
- Reduction in the budget deficit
- Control the money created by government.
- Supply-side policies: the continuous un-competitiveness and costs increasing cause more inflation. This can be regulated by supply-side policies such as easier labor market which can reduce the pressure of inflation. But these take a long time and can be considered as a last resort to inflation.
The topic of inflation control has become the main concern for governments and this helps the economy and its development to a great extent.