This is the second serious problem that worries
modern public authorities. Ordinarily inflation is associated with
rising price conditions. But to be accurate we can define inflation as a
situation under which general level of prices shows tendency of cumulative and continuous upward rise.
For rising prices to be considered inflationary, all these three conditions must be satisfied. In the first place, the rising trends of the prices should be general and
not sectional. Consumers and producers, goods, raw materials, interest
rate, wages, imports and exports prices should all contain an element
of inflationary pressure. In the second place, such price changes must be cumulative
in the sense that the prices of finished products should have risen
because of higher prices of raw materials, or the prices of goods should
have risen because of higher wages and vice versa. Finally,
inflationary price rise should be continuous. The rounds of rising
prices should be repeated month after month and year after year.
Inflationary situations in almost all parts of the
world have become very common in the post World War II period. A high
degree and long phases of inflation are very a complex phenomena. There
are a variety of contributory causes. These are the forces active both on the supply (cost of production) and demand
(total private and public expenditure) sides of the economy. A section
of economists, such as Sir Irving Fisher, A.C. Pigou, Dr. Friedman,
known as quantity theorists or monetarists uphold the view that an excessive supply of money, or unexpected changes in the money supply, is the chief cause of inflation.
On the contrary, Keynes and his followers held the view that so long as there exist unutilized resources and unemployed
labor, an increased money supply will not cause inflation. In a modern
economy year after year there is some increase in the supply of the
quantity of money in circulation. Normally, the annual increase in the
money supply is 3 to 4 percent. This is essential to keep pace with
increase in the productivity, increase in the size of the population and
changes in some other dynamic forces. Therefore annual rise in the
price level to that extent (of the order of 4 percent) is not considered
inflationary. Any further rise in the price level in excess of 4
percent will then cause an inflationary pressure on the prices.
Suitable measures, such as controlling money supply
and public expenditure, regulating prices, improving supply conditions,
restricting wage and cost hikes, can be introduced to contain inflation
and to restrict price level. Various theories analyzing inflationary
price changes have been developed. These are: Cost Push or Demand Pull. Besides internal causes, even international trade activities cause spread of inflation through the imports of goods and services.
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