Understanding and fighting inflation

Inflation is a general increase in prices and a fall in the value of money. There are three levels of inflation: creeping, galloping and hyper-inflation.

Creeping inflation is a small rise within single digits. Many economists fell that this is beneficial to business in that an increase act as an incentive to business to produce more when they see that their sales will bring them more income.

Galloping inflation is the commonest bogey of the three types. It is usually double digit. While it enables some businesspeople to make a killing, it kills others. Malawi’s inflation is within the galloping category. Money loses value, but the loss does not go out of hand.

Hyper-inflation is a nightmare to an economy. Inflation may be as high as 1 000 percent. It turns money to takataka mere refuse. We will dwell on galloping inflation, which is the one that is bothering us.

What are the causes of inflation? The answer is encapsulated in the phrase “too much money chasing too few goods”, the corollary question is what causes the mismatch between the quantity of goods and the quantity of money. If the quantity of goods in the economy remains constant, but the quantity of money increases, there will be a general rise of prices. This happens when a central bank prints extra notes at the behest of government.

The quantity of money may remain constant but the quantity of goods may decline then there is a general rise of prices takes place. In Malawi, this happens as the rain season approaches when people have less maize to sell and there is a general shortage.

With this summary, it can also be postulated that combating inflation involves keeping the quantity of money in check or alternatively increasing the quantity of goods. During the harvest season, inflation declines because the supply matches or outmatches the demand.

In Malawi, commentators on this macro-economic tend to concentrate on inflation, interest rates and the strength of the kwacha. Key economic phenomena such as gross domestic product (GDP) growth rates and unemployment are given short shrift. Yet, there are basic to the health of the economy.

When an economy is growing at substantial rates such as six to 10 percent annually inflation will be held in check, most people will have jobs, they will be engaged in the production of goods, which prevent inflation that originates with scarcity of goods.

Emergency situation usually force government to borrow money from central banks. This simply means they instruct central bank to print more notes. Wars are the most and serious such situations.

To keep inflation under control, governments usually impose price control on essential goods such as food items. They ration some of them to make sure that the few goods available are reserves for industries, which contribute to war effort. The kind of inflation that exists during a period of prolonged warfare is known as suppressed inflation. Goods are deliberately priced low. When the war is over and price control are removed, a period of galloping inflation follow until the economy is producing enough goods on which people can spend their money.

Economic textbooks usually categories inflation into ‘cost push’ and ‘demand pull’. Cost push inflation starts when factors of production cost higher and affect the costs of the final products. At present, the most common source is the cost of energy. When producers and seller of petroleum products increase prices, importers have to import such products at higher rates. To make profit, they increase prices of their final products and services.

Worker upon realising that the good they normally buy are now more demand increase in wages to cope with the higher cost of living. If the employer dithers or refuses the employees go on strike. If the employer is in order to avert strikes, grants the increase to find the extra money to pay the extra wages and salaries he or she increase the prices that he or she charges customers. We then have a second round of price spirals.

Demand pull rises when people have more money to spend than the goods available on which to spend it. How do people come to have more money than normally? If there is a sudden scramble for our exports abroad, farmers and exporters will be earning more than usually. They will be competing for scarce goods.

In developed countries, political parties seeking election focus their manifestos on two issue: better a little more inflation and less unemployment or better reduced employment accompanied by a slowdown of inflation.

Those of us who usually through the press inform the public about inflation rates should also be commenting on the economic growth. Is the inflation deterring or boosting investment and economic growth? In what sectors is growth taking place or slowing down.

In the 50 year of our independence no government as far I know has published statistics on unemployment levels. Some people guess unemployment in Malawi as being as high as 50 percent.n