Causes of Inflation & Possible Solutions

Price of any good is highly related to its demand & supply. If the supply of any good is less in the market and its demand is comparatively higher, then this shortage has led to higher prices.

 Reasons of higher inflation

  • When per capita income & supply of money in any economy increases, then same product is demanded by more and more people and if production of the demanded good is not at that level then the price of that good increase to control the higher demand.
  • When the value of money of a particular economy is decreased with respect to other nations from where the goods are imported.
  • Stocking of products by the suppliers for the future to take a bigger gain at the time of crisis of that product.
  • Rigidity in supply of products due to the problems in supply chain management & warehousing.

How to control inflation of an economy

There are broadly two ways of controlling inflation of an economy: Monetary measures and Fiscal measures

Monetary measures

  • Central Bank increases the interest rates to decrease the supply of money in the market.
  • To Control inflation, central bank sells the government securities to the public through the banks. This result in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.

Fiscal measures

  • Increase in taxes which reduces the amount ,people can spend and which in turn reduces inflation
  • Reducing the subsidies and welfare payments.
  • By increasing the export of goods and decreasing the import of essential items.