Inflation – Cause and Control

A Mild Inflation is always good for Economy as it increases the price of goods gradually; this motivates the producer to produce more that result in the creation of New Employment Opportunities as well. It also helps in creating healthy competition within the Economy.

Cause of Inflation

1. Increase in Demand: - We know that if Demand of a product rises and supply decreases, its cost also increases. The producer manages up to a certain level by increasing the production but after a certain point, the production restricts due to which the price rises suddenly that creates INFLATION.

2. Increase in costs: - With the increase in the cost of production, sometimes the company passes the cost directly to the consumer’s head. This rise can be any form i.e. Rise in cost of labor, raw material etc. It increases the price of the product in order to cope up with the increased cost price and hence there is a situation of inflation in the economy.

3. Increasing the producer’s Profit: - Sometimes producer wishes to increase the profit margin so, in order to match the goal, they increase the price of the product. If the price of the commodity increases, Inflation may occur.

4. Increase in taxes: - If the government increases the taxes required to be paid by the company the cost of production for the company will increase. Therefore, the company would accommodate this cost of production in the price of the commodity and the price of the commodity will increase causing inflation.

5. Printing of more money by RBI: - If more currency is printed, more money flows within the economy. This gives more power to the consumer, due to which the demand increases. Increased money supply to buy the same amount of goods would lead to a rise in prices. This is a clear sign of Inflation.

Ways to Control Inflation:

1. Minimizing the Growth Rate of Population: - Inflation is caused by an increase in demand therefore if there is less demand then it can control Inflation. Reducing the rate of growth of population is a vital way of controlling inflation as if there are fewer people, the goods demanded would be less and, therefore, inflation can be controlled.

2. Cutting the Production Cost: - If the cost of production is reduced, companies will not be able to increase the price of the commodity. This might help in avoiding Inflation.

3. Increasing saving: - If people became more dependent on saving, they will have less money to spend that decreases the demand resulting in combating the Inflation.

4. Cope up with Production: - The final way is to increase the production as per the demand and try to stabilize the demand and supply.