Ways of Controlling Inflation: Recommendations to Zimbabwean Policy Makers

Ways of Controlling Inflation: Recommendations to Zimbabwean Policy Makers

Inflation can be defined as the general rise in price levels of goods and services in the economy in a period of time. High levels of inflation are not desired as it is associated with many consequences. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation is also an erosion in the purchasing power of money. It is the role of Central banks to control the level of inflation in their respective economies. However the Central bank is not always to blame, it needs independency for it to control inflation. In mature market economies, inflation crises do not arise, because the full power of monetary policy is devoted to this one task, Business Standard (2008).Usually a single digit inflation is preferred. High levels of inflation shows inefficiency of the Central bank and hence the economy as a whole. The consequences of inflation are quite serious. It has bad effect on growth, because it increases uncertainty and discourages savings. It is also damaging for the balance of payment, because it makes imports cheaper. It distributes incomes in favour of profit earning, away from fixed earning pensioners, whose real income will fall. Inflation should be stable over time, to make economic planning easy and also to ensure effective forecasting. Stable inflation attracts foreign direct investment and strengthen the currency so that it is acceptable as a medium of exchange on international markets and can be used as a store of value. Hence it is worth for policy makers to put in place measures to control inflation.

Controlling inflation means understanding how it arises. This implies that a measure to control inflation should be in line with how inflation emanates. There are various types of inflation, and the most basic include demand-pull inflation, cost-push inflation and imported inflation among others. Demand-pull inflation arises when demand for goods increases faster than the economy could produce and hence prices are raised to ration the demand for goods and services leading to inflation. Cost-push inflation arises when there is a rise in the cost of producing goods and services and hence through mark-up, prices of goods and services are raised. Imported inflation arises when imports prices rises especially when the country is importing inputs for other production of goods.

The effective control of inflation rests mainly on the fiscal discipline, monetary discipline and exchange rate policy in the economy. Monetary discipline means that the Central bank should tally the money supply to the level of production in the economy or the level of reserves the economy has at that time. The Central bank should not print excess discretionary paper money. Money printing should be based on an economic formula that should not be violated. To achieve this the Central bank should be independent from the political economy.

Fiscal discipline implies that government spending should be controlled in order to control inflation. It involves increase in tax levels and reducing government spending. However the increase in tax levels is subject to debate as it is not socially acceptable to unequal societies. According to the Tax Handle theory, developing countries tend to tax more on those easy to tax sectors, there is need for base broadening. There is a large informal sector in the developing nations and hence raising taxes is just like punishing the existing tax payers. So in this case controlling government spending is the best emphasis in order to control inflation.

An Exchange rate policy should be put in place, this involves pegging the currency against a more stable currency like the United States dollar. However this does not work in currently in Zimbabwe as the economy has no currency of its own.

The government should reduce borrowing. The more the government borrows, the more money supply increases and hence inflation increases. Also borrowing should be against capital goods and not towards consumption. Capital goods are just like investment and there is a future return, whilst consumption will only mean a burden to the current and future generations.

Increasing the interest rate is another way of controlling inflation. This reduces the aggregate demand, and makes saving attractive. It reduces the consumer spending behavior. Increase in interest rate reduces disposable income of those with mortgages.

Direct wage controls or income policies may be put in place. This involves setting limits on the rate of growth of wages. In the private sector the government may try moral suasion to persuade firms and employees to exercise moderation in wage negotiations. However, this causes greater job insecurity and some workers may trade off lower pay claims for some degree of employment protection.

Monitoring and controlling the supply side is also appropriate. Privatization and deregulation will also help in the controlling of inflation as they improve the production capacity in the overall economy. Privatization is the act of privatizing parastatals because many operate at a loss and usually press pressure on the government to finance the losses. So, by privatizing government s

Policy makers should also monitor and control the issue of import licences. Import licences should be given to a sizeable companies to erase monopoly. It has been noted that importing companies inflate their prices for the imported prices as they have the power to do so and thereby making super normal profits.

Labour market reforms will also help in reducing inflation. For example the weakening of trade unions power, the growth of part-time and temporary working along with the expansion of flexible working hours. This helps in managing the cost-push inflation as labour costs are reduced. This is the longterm solution to inflation control in the economy.

Supply side reforms, also are long term solutions to inflation and they seek to increase the productive capacity of the economy in the long run and raise the trend rate of growth of labour and capital productivity. Production should match the demand level.

Other causes of inflation include natural disasters like droughts. If there is drought in an economy, the government will spend a lot of money buying from other countries. Whilst it is difficult to put a policy against natural disaster, government should forecast ahead for such happenings. For example in Zimbabwe it is likely to e drought after every 10 years, so the government can prepare for it and this will make inflation controllable.

Joining a Monetary Union, can be a solution to inflation management. This improves independence in the determination of money supply in the economy. It reduces the Central bank's power to print excess discretionary paper money.

In conclusion, policies to control inflation are directed towards the causes of inflation rise for example there is Wage inflation, Food inflation among others. In reality the inflation is often multi-causal. Generally inflation should be controlled, as both deflation and hyperinflation causes instability in the economy. To enhance economic planning authorities in developing countries should set an inflation range, in which they expect to operate in, a specific inflation figure has been hard to attain as policy reversals are high.

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