TUESDAY, FEBRUARY 10, 2009

UNDERSTANDING INFLATION and HOW to OVERCOME INFLATION

Understanding inflation and how to overcome Inflation Understanding Inflation. Inflation can be defined as the tendency of rising prices of goods and services generally held constant due to unequal flow of goods and the flow of money. From this we can see the condition of a country that is experiencing inflation, namely: 1. Prices of goods in general will rise continuously 2. the money supply exceeds demand 3. value for money has decreased The emergence of Inflation The emergence of inflation can be seen from: 1. Based on the severity of inflation - Inflation mild, below 10% a year - Inflation is, between 10% - 30% a year - Severe inflation, 30% - 100% a year - Hyperinflation over 100% a year 2. Based on the incidence of inflation - Inflation that comes from the domestic (domestic inflation), inflation was caused by state budget deficit and the resulting failure of the market price of basic needs to be expensive. - Inflation comes from abroad (imported inflation), occurs because the increase in prices of goods in other countries, the production cost of foreign goods is high, the increase rate of imports of goods 3. Based on the causes of the emergence of inflation, can be classified: a. Pull demand (demand pull inflation) This inflation occurs because the aggregate demand will continue to various items increases, for example: - Increase in government spending financed by printing new money - Increase in private investment spending because of the ease of bank credit Description: P = Price equilibirium (price before the increase) S = Supply (supply) which is assumed to be fixed D = Demand (demand) before experiencing a change D '= Demand (demand) after experiencing a change, increased due to increased purchasing power P '= Price (price) after an increase due to shifting demand (D) of D to D ' b. Pressure cost (cost push inflation) This inflation caused by rising production costs, usually beginning with: - Increase in production costs, such as wage increases, rising prices of capital - Reduction in the number of bidding - Rising prices coupled with decreasing number of production P = Price Equilibrium (initial price) D = Demand (demand) is assumed to be fixed S = Supply (supply) S '= Supply (quote after decreases) P '= Price (price) after an increase due to reduced supply from S to S' Q = quality of goods c. Inflation mixture, due to a combination of elements and pull inflation cost-push inflation. d. Imported inflation, due to the influence of foreign inflation and the existence of trade between countries. For example: a country experiencing inflation, then the production of these countries required by other countries and imported, the price of these goods increased. HOW TO OVERCOME INFLATION Efforts to overcome inflation should start from the causes of inflation in order to find a way out. Theoretically to cope with inflation is relatively easy, in particular by overcoming the main base, reducing the amount of money in circulation.

The following policies are expected to tackle inflation: 1. Monetary policy, all government policies in the monetary field with the aim of maintaining monetary stability to improve the welfare of the people. These policies include: a. Politics discounts, by reducing the money supply by raising interest rates, it is expected the demand for credit will be reduced. b. Open market operations, reducing the money supply by selling SBI c. Increase cash reserves, so the money is distributed by commercial banks to be reduced d. Selective credit, central bank policy to reduce the amount of money in circulation by means of granting credit e. Politics sanering, this is done when it happened hyper inflation, BI was never done on December 13, 1965 which cut the money from Rp.1.000 be Rp.1 2. Fiscal Policy, can be done by: a. raise tax rates, expected by society to deposit some more money to the government as tax payments, thus reducing the amount of money in circulation. b. Organize government revenues and expenditures c. Conducting government loans, such as cutting government civil servant salaries 10% for savings, this happened during the old order. 3. Non-Monetary Policy, can be done through: a. Increase production, the Government provides subsidies to the industry to be more productive and produce more output, so the price will be down. b. Wage policy, the government appealed to unions not to ask for a raise while being inflation. c. Supervision prices, government policies to determine the maximum price for the goods certain goods.
Posted by Mhya at 10:20 AM Labels: Understanding inflation and how to overcome Inflation

Cost-Push Inflation And How To Combat It Inflation is a hot topic at the moment with prices rising at over 5% according to the RPI measure and the Bank of England's Monetary Policy Committee split over whether or not to raise interest rates. Rising price levels in the UK are usually a combination of both demand-pull and cost-push inflation. Below is an extract from my evaluation of the possible economic policies governments might use to tackle cost-push inflation:

Cost push inflation can be defined as a rising general price level caused by an increase in the costs of production, shown by a shift of the economys SRAS curve to the left. When pursuing a course of remedial action targeted at reducing cost push inflation, policy makers must be careful to correctly diagnose the cause of inflation. The development of stagflation in the economy, (i.e. the combination of rising prices and falling output) is a very real possibility if cost-push inflation is incorrectly diagnosed as demand pull inflation and policy-makers raise interest rates in order to reign in consumption expenditure, which is perceived as the main cause of the rising price level. Governments can use a range of domestic policies to reduce cost-push inflation however international policies are also required in todays globalised world market.

The government can use a range of domestic policies to reduce and prevent the negative impacts of cost-push inflation. The major cause of cost-push inflation is seen as the growth of monopoly power in the labour market as a result of the increasing strength of trade unions which has contributed to wage inflation. In order to reduce cost-push inflation, governments can reduced the strength and therefore bargaining power of trade unions, meaning firms will pay less in wages, lowering their costs of production. In addition to this the government can attempt to increase the flexibility of labour using microeconomic reforms as the Labour Government did through The New Deal in 1998. These reforms could include providing better education and training creating a more skilled workforce as well as a reduction in benefits to incentivise work. A final domestic policy which is particularly difficult to achieve but would in

todays current inflationary climate (caused by rising oil prices) be very effective would be to make the pound stronger. By doing this imports would be cheaper for British firms who rely on them and therefore in turn their costs of production and therefore prices will also be lower.

However domestic policies alone are not enough to prevent this type of inflation which can be tackled most effectively through international policies. These include investing in alternative energy sources and alternative energy suppliers so that world markets are not held to ransom by the spiralling price of oil provided by an increasingly limited number of monopoly suppliers. In addition to this, polices to promote free trade can also be beneficial as they would force UK firms to reduce prices in order to compete. Food self-reliance through GM crops has also been put forward as a way of reducing the UKs dependence on imported foods and price ceilings have been recommended, however these are likely to do more harm than good.

In conclusion the best way to reduce cost-push inflation is through long term policies, both through international and domestic reforms. Microeconomic changes are primarily the most effective when trying to achieve this, however creating a climate of low production costs is very difficult. Before taking any action, governments must be particularly careful to identify the cause of inflation, so as not to cause stagflation in the economy.

Increase competition. Competition puts pressure on prices and lowers prices to reduce cost-push inflation. Of course another way is to outsource manfuacturing to third world countries that have a lower production cost - this however may not decrease cost-push inflation in the case where the companies use the lower production cost for higher profit margins.

by umar z Member since: December 09, 2007 Total points: 441 (Level 2)
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there are many point to reduce the cost push inflation. 1. To reduce the middle men because he is the basic reason of increase in price. 2. To enforce the other firm to invest in this Field. The government give the incentive or subsidy. 3. Government can give the subsidy to reduce the cost of production. 4. New technolory will be used to reduce the cost. 5. Basic infrastructure i.e. roads, bridgees etc. will be made between the place of production and market. 6. To reduce the taxes by the government.