The poor shall always be with you,” said Jesus Christ and we might add that as long as inflation continues, the poor will become poorer while some of the rich become richer.
Inflation is the constant rise in the price level. Price of goods and services do not rise at the same rate. Those which concern goods and services that are in greater demand experience higher rates.
What causes inflation? When the Nobel Prize laureate economist Milton Friedman said that inflation is always that everywhere there is a money phenomenon, he was only stating differently what other economists had said that inflation is too much money chasing too few goods. He is given more credit than he deserves.
Inflation is better understood when classified as cost-push and demand-pull. Cost-push is the inflation that arises because costs of production have risen. Take for instance; members of a trade union by staging a strike have compelled their employer to raise wages and salaries beyond what has been budgeted for. To raise the extra money to pay his employees, he raises the prices of goods and services that he sells.
This rise will affect the employer’s customers. Suppose the employer is a transporter. By raising the fares or freights he compels his customers also to raise prices of the goods and services. This is how general price rise alias inflation comes about. That is because of the rise in the cost of productions.
In recent world economic histories, the most notorious cost-push inflation was one which was occasioned by the rise of oil prices when Organisation of Petroleum Exporting Countries (Opec) agreed to hike their prices to punish those countries which had taken side with Israel. Prices rose in Europe and America and then in developing countries though they had been neutral in the war between Arabs and Israelis.
Demand pull inflation is where economists talk of too much money chasing too few goods. How does this too much money come about? Mostly from government budgetary deficits. When there is pressure from the public for more services and government receipts from taxes do not suffice, the government used borrowed money to provide the extra services. It is this borrowed money that is called deficit financing.
The government borrows the extra money it needs from the central bank. The Minister of Finance authorises the central bank to print extra notes for government use. Unless the economy is growing, too much money is in this way injected into it. We then have too much money chasing too few goods.
If printing too much money will cause inflation to escalate, why do governments not refrain from deficits? The answer is that sometimes there are compelling circumstances. Take the current situation in Malawi. For the past two or three years as a result of devastating floods in one part of the country and droughts in the other, the country had shortages of maize of the gravest type. The government had no option but to try and save people’s lives. Appeals to donors have alleviated but not cured the calamity. The government had therefore to resort to borrowing which locally means printing extra notes.
In almost all countries, demand pull inflations rise to the highest level when the countries are at war with other countries. If what had been budgeted for the defence of the nation has proved inadequate and yet the country is in danger of being overwhelmed by enemies there is no other alternative but to borrow the money needed. Wars are the major culprits of double digit or even hyper-inflation.
Malawians are to be congratulated that despite the dire situation in which their country is, inflation lingers around 20 percent. Inflation was much higher following the first multi-party election of 1994.
Inflation makes bank deposits worthless. What you can buy with K1 000 this year in another year, you find you must pay K2 000 or more otherwise do without it.
Inflation hurts mostly those whose incomes are fixed like pensioners. Some businesspeople prosper during shortages of goods. Because of shortage, those in the business of selling maize are able to raise prices to what the starving people can afford and make hefty profits.
Inflation gets worse because of expectations. If you enter a contract with someone who believes that inflation will be worse in 12 months time, he or she will demand from you higher payment to protect the value of what he loans you.
Trade unions when demanding overboard increments do not look just at the present situations but what it will be like in two or three years. n