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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