- Effects on the economy
- Economist’s advice
- Controlling inflation
Inflation means a common rise in the prices of services and goods in a particular country, resulting in a fall in the value of money. When the general prices level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects a reduction in the purchasing power of money.
Inflation’s effects on an economy are different. Negative effects of inflation include a decrease in the real value of money and other monetary investment and savings. High inflation may lead to shortage of goods if consumers begin hoarding out of concern that price will increase in the future.
Economists generally agree that hyperinflation is caused by an excessive growth of the money supply. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services or changes to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Today, most mainstream economists favour a low, steady rate of inflation. Low (as opposed or zero or negative) inflation may reduce the severity of economics recessions by enabling the labour market to adjust more quickly in a downturn.
There are a number of methods that have been suggested to control inflation. Central bank can affect inflation through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation. Monetarists emphasis on increasing interest rates and slowing the rise in the money supply.
Most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries. This policy of using a fixed exchange rate was used successfully in many countries in South America.
Economies based on the gold standard rarely experience inflation above 2 percent. Another method attempted in the past has been wage and price controls. The employment contracts, pension benefits and government entitlement (such as social security) must be tied to the consumer price index to mitigate the effects of inflation.
In Pakistan, inflation is one of the main problems of society. Unemployment, poverty, illiteracy, street crimes, suicide attacks and a number of other vices are directly linked with inflation. The government must take steps for controlling inflation with the above-mentioned measures otherwise massive unrest in public may aggravate the situation beyond description.