Methods to Control Inflation

Readers Question can inflation be reduced or eliminated in Nigeria. why or why not?

After experiencing inflation of 50% plus in the mid 1990s, inflation in Nigeria is currently 11.5% (2009) (link) GDP growth is currently about 3.8% (2009)

I don’t know much about the Nigerian economy. But, with these statistics, we can consider ways that inflation could be reduced.

Monetary Policy

With growth of 3.8%, demand in the economy could be growing faster than capacity can grow to meet it. This leads to inflationary pressures. We can term this demand pull inflation. Therefore, reducing the growth of Aggregate demand, should reduce inflationary pressures.

The Central bank could increase interest rates. Higher rates make borrowing more expensive and saving more attractive. This should lead to lower growth in consumer spending and investment. (see more on higher interest rates)

see also: Evaluation of monetary policy in controlling inflation

A higher interest rate should also lead to higher exchange rate, which helps to reduce inflationary pressure by

  • making imports cheaper.
  • Reducing demand for exports and
  • Increasing incentive for exporters to cut costs.

inflation-interest-rates

Interest rates were increased in the late 1980s / 1990 to try and control the rise in inflation

Fiscal Policy

The government can increase taxes (such as income tax and VAT) and cut spending. This improves the budget situation and helps to reduce demand in the economy.

Both these policies reduce inflation by reducing growth of Aggregate Demand. In Nigeria’s case, the economy seems to be growing reasonably strongly. Therefore, we can reduce inflationary pressures without causing a recession.

If Nigeria had high inflation and negative growth, then reduce aggregate demand would be more unpalatable as reducing inflation would lead to lower output and higher unemployment. They could still reduce inflation, but, it would be much more damaging to the economy.

Other Policies to Reduce Inflation

Wage Control

If inflation is caused by wage inflation (e.g. powerful unions bargaining for higher real wages), then limiting wage growth can help to moderate inflation. Lower wage growth helps to reduce cost push inflation, and helps to moderate demand pull inflation.

However, as the UK discovered in the 1970s, it can be difficult to control inflation through incomes policies, especially if the unions are powerful.

Monetarism.

Monetarism seeks to control inflation through controlling the money supply. Monetarists believe there is a strong link between the money supply and inflation. If you can control the growth of the money supply, then you should be able to bring inflation under control. Monetarists would stress policies such as:

  • higher interest rates (tightening monetary policy)
  • reducing budget deficit (deflationary fiscal policy)
  • Control of money being created by government

However, in practise, the link between money supply and inflation is less strong.

Supply Side Policies

Often inflation is caused by persistent uncompetitiveness and rising costs. Supply side policies may enable the economy to become more competitive and help to moderate inflationary pressures. For example, more flexible labour markets may help reduce inflationary pressure.
However, supply side policies can take a long time, and cannot deal with inflation caused by rising demand.

Ways To Reduce Hyperinflation

In a period of hyperinflation, conventional policies may be unsuitable. Expectations of future inflation may be hard to change.  When people have lost confidence in a currency, it may be necessary to introduce a new currency or use another like the dollar (e.g. Zimbabwe hyperinflation).

Ways to Reduce Cost Push Inflation

Cost push inflation (e.g. rising oil prices can lead to inflation, but, also lower growth. This is the worst of both worlds, and is more difficult to control without leading to lower growth.

17 Responses to Methods to Control Inflation

  1. Adam - Sri Lanka August 13, 2010 at 12:37 pm #

    It is very helpful. Keep it up thank you very much

    • Eltön September 17, 2012 at 6:22 pm #

      grtly explaind thanks kp up the gd work

  2. nyaradzo tenha September 16, 2010 at 1:06 pm #

    i am doing a national diploma in human resources management and i have found this information to be very useful. please send me more information on my email

    thank you

  3. markos November 15, 2010 at 6:00 pm #

    very helpfull please send me any more information about how to reduce inflation
    thank you.

  4. tazan buhari November 30, 2010 at 1:06 pm #

    i do really appreaciate ur effort. i have just been able to do my assignment from here. pls keep it up.

  5. Ally Munir February 12, 2011 at 2:23 am #

    Thanx for ur very useful materials. I done my assignment well. KEEP IT UP!!

  6. Tonia April 9, 2011 at 7:56 am #

    This was really helpful I wouldn’t mind more

  7. Nura Alam Jeko June 4, 2011 at 3:53 pm #

    This information is helpful but there are some sorts of lack age. Because I need more clear information. this is sorted by some rules which will be problem to understand to some people. and this a really helpful. thank you……..

  8. ravi June 17, 2011 at 12:11 pm #

    that is very useful info.

  9. deepfixa June 29, 2011 at 8:00 am #

    Thankyou man very helpful indeed.

  10. tapiwa majanga July 4, 2011 at 7:20 pm #

    this iz good learning mateerial , greatly appreciated

  11. Wendy July 5, 2011 at 12:00 pm #

    Helpful done my assignment well but nid mo info

  12. msizi sibiya July 13, 2011 at 11:44 am #

    this is very helpful thanks a lot!!!

  13. Nikhil sharma January 15, 2013 at 9:58 am #

    Thanx for giving me the information about controlling measures. It is really helpful. However, kindly suggest me that which of measure is most important in all of these.

  14. panashe kuvenguwa May 1, 2013 at 8:32 am #

    there are two ways to reduce inflation which are fiscal policy and monetary policy …monetary policy is done by the govenor e.g in zimbabwe it is done by the govenor of the reserve bank of zimbabwe , whilst on the other hand fiscal policy is implemrnted by the government…..thats what i have for you guyz

  15. sandeep-India Hyderabad June 5, 2013 at 4:35 pm #

    The government can stop inflation by reducing the consumer expenditure component of GDP by increasing taxes or by reducing transfer payments

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