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Inflation: a brief overview

There is much talk about inflation in the media in recent times. “Radioteleconomists” have presented different and ofthen misleading interpretations in discussions. This piece  seeks to present the subject from a somewhat informed perspective.

Inflation, properly defined is a continuous increase in the general price level in an economy over a given period of time. It is calculated by measuring how prices of selected goods and services change over a given time. So if the rate of inflation is 10% for a given month, it means that the price level of all the goods under consideration have increased by 10% over the level of the previous year’s corresponding month. So say, January last year against January this year. Assuming that it costed 100Cedis to buy a set of 20goods under consideration (i.e.CPI basket) in January 2011, it now cost 110Cedis to buy the same set of goods in January 2012. The price increase should however not be due to improved quality. An improvement in quality would mean that the value of the commodity has increased. However in calculating the inflation, the comparison must be of a good whose quality has not changed but whose price has increased.

Inflation is caused by a number of factors. Among these factors is an increase in the money in the hand of consumers and an increase in the cost of production.  When people have so much money in their hand they tend to be induced to make purchases. When the rate of increase in supply of commodities does not keep up with the rate of increase in demand, sellers tend to increase their prices. When this increase in price is reflected across commodity markets it gets recorded as inflation. Take for instance a pupil who buys ice cream for 10p a scoop. If he is given 1cedi as pocket money daily, and assuming he spends all this money on ice cream, he can buy 10 scoops. Overtime, the ice cream seller will increase the price of the ice cream since the boy is able to buy with relative ease. This process will go on until the boy can no longer buy more than he needs or more than necessary. His excess demand of ice cream has resulted in the increase in price. This will however  not be inflation until a similar trend is recorded across commodity markets, especially commodities considered in the calculation.
Should we feel inflation in our pockets? The simple answer is yes! 

Logically, observant people would notice that at a high rate of inflation, cost of living rises very fast, and standard of living falls quicker. In a lower rate of inflation, the reverse holds. How you feel inflation is that when it is high your salary buys fewer goods over a relatively shorter time interval. Therefore a low inflation rate ensures that the value of your fixed salary does not fall quickly. In short if the rate is high everyone gets poorer more quickly. The money in your pocket will stay longer if the rate is low. Low inflation is good and we all need to appreciate it and call for it. If prices reduce say from, 1cedi to 90pesewas, the decrease is deflation. As long as we talk of inflation the general level of prices will rise. Prices only decrease under deflation. A decrease in the rate of inflation is not equal to deflation.
Who controls inflation? Inflation can be controlled by everyone. The individual consumer may not be conscious of his influence but the government deliberately institute policies to control it. The issue of inflation is about behaviour of markets; all players in the market can thus influence it.

 Everyone (individuals) can help beat down inflation if we beat down frivolous expenditure and spend on what is essential and buy goods in moderation. The government knows what to do. Some economists argue that some level of inflation is good for the economy.
It is my hope that the above will guide your commentary and discussion on the subject in subsequent fora.     

By: Aboyadana Amobila Gabriel

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