Effects And Control of Inflation

Inflation has both positive and negative effects:

The Positive effects

1. Reduction in burden of debt: During inflation, debtors gain because there is too much money in circulation, which will enable them to pay their debts with ease.
2. Higher profit margin: Because producers are selling their goods at higher prices, this will lead to higher profits.
3. Higher tax yield: As a result of high volume of money in circulation, government is able to realize high yield from taxes.
   
   
4. Higher output: Higher prices of goods and services during inflation encourage producers to embark on large scale production, resulting in greater output.

The negative effects

1. It discourages savings: During inflation, people spend more money leading to low or no savings.
2. Increase interest rate: The rate at which banks give loans to customers increase during inflation.
3. Income redistribution: Inflation redistributes income haphazardly. There is a fall in real income especially of those on fixed income e.g. pensioners.
4. Creditor loss: The value of money received is far less than the value of money lent out.
5. Loss of value for money: Money losses its value generally during the period of inflation.
6. Fall in standard of living: Inflation brings lots of problems to salaries earners as they spend it on costly goods and services, leading to a fall in standard of living.
7. It discourages investment: Low value of money coupled with little or no savings discourages investment.
8. Balance of payment problems: Inflation cause problems of balance of payment since foreigners will want to sell and also do minimal buying from countries with inflationary trend.
9. It discourages exports: High prices during inflation discourage export since such countries will be high-cost producers.

CONTROL OF INFLATION

Inflation can be controlled in the following ways:

1. Use of contractionary monetary measures: The use of contractionary monetary measures such as increase in bank rate, deposit ration, open market operation and moral persuasion can help to control inflation.
2. Use of fiscal measures: Inflation can also be controlled with the use of fiscal measures to reduce the amount of money in circulation e.g. Increase in direct taxation.
3. Effective price control system: Inflation can also be controlled through the use of effective price control system e.g. price control board by government officials and the application of rationing to maintain price level.
4. Reduction in government expenditure (or surplus budget): Government should reduce expenditure and it will go a long way towards reducing the amount of money in circulation.
5. Industrialization: Industrialization will reduce over-reliance on imported goods and brings about increase in output which will reduce prices.
6. Increase in production: Inflation can be controlled by increasing production or output in order to bring down prices of goods.
7. Use of income policies: Use of income policies such as wage freeze and delay in promotions is equally a way of controlling inflation.
8. Discouragement of importation
9. Granting of subsidy to enterprises.
10. Checking the activities of boarders.
11. Removal of bottlenecks in distribution system.