Categories
Economics

Walking Inflation

Inflation is normally associated with a depreciation of country’s currency implying a decrease in purchasing power. It is not reflected by high prices but by the rise in the overall price level. The average rise in prices over a certain period of time is measured by taking a basket of goods used by people combined with services and calculating the average price increases overtime. It is important to note that, a sudden increase in price does not necessarily imply inflation, such price increases could indicate short term market reactions. Therefore, inflation is indicated by a state of disequilibrium that occurs together with a sustained rise in the price level. Of the different types of inflation walking inflation is seen as one of the moderate types.

What is Inflation

Inflation is a monetary phenomenon where there is a continuous and persistent increase in price levels resulting in a decrease in purchasing power. Inflation is a form of taxation that can be imposed without legislation. An increase in the supply of money compared to goods available in the market is one of the causes of inflation. Also, a shortage in the amount of goods and services can result in an increase in prices. There are three types of inflation which are creeping, walking, running and hyper-inflation. Creeping inflation is mild and not dangerous to a country’s economy. Creeping inflation can be used as an important instrument for economic development. Walking inflation occurs when prices rise moderately, when the inflation rate is a double digit it is referred to as running inflation. Hyperinflation occurs when the rate of price increases becomes immeasurable. Running inflation is an indicator of hyperinflation. The general price level is usually measured by different price indices with the consumer price index being the most important one.

Causes of Walking Inflation

The causes of walking inflation are similar if not the same with the causes of all the other types of inflation. The major causes of walking inflation are either an increase in demand which exceeds the supply of goods and services or a decrease in the supply of goods and services. There are 2 schools of thought that attempt to explain the causes of inflation. According to monetarists or classical economists, inflation is a result of an increase in the supply of money. This in turn causes an increase in the demand for products and services which pushes prices upward. According to the Keynesians, inflation is a result of aggregate demand which could be fuelled by investment spending, government expenditure or consumer demand. An increase in aggregate demand pushes prices upwards resulting in inflation. The Keynesians do not associate an increase in the price level with money supply. Both the classical and Keynesian school of thought can be used to explain the causes of walking inflation.

  • An increase in the population size

An increase in the number of people as a result of high birth rates or immigration can cause walking inflation. This is because when there are more people demanding goods and services at a rate which is faster than the rate of increase in production prices will be pushed upwards.

  • Higher Export earnings

High export earnings can be attributed to an increase in the general price level. Higher export earnings increase the purchasing power of exporting countries as a result, increase the aggregate demand. The result will be an upward push on the price level.

  • Repayment of public debt

If the government repays the public debt it is injects money back into the country. Investment and consumer spending might result in an increase in the general price level.

Cost push inflation

Walking inflation together with all the other types of inflation do not result only from demand pull inflation (DPI), or the demand side. Inflation can be a result of rapid increases in production costs. Such causes are usually associated with non-monetary factors. The major causes of cost push inflation, (CPI) are an increase in the price of raw materials and a rise in wages. When the cost of production increases, producers increase the prices of their goods and services. However, an increase in wages and salaries may be associated with an increase in productivity and the result may not be a rise in prices, although this is rare. It is important to note that a rise in prices due to an increase in the cost of production can result in an inflationary wage price spiral. When the prices of goods and services increase, trade unions demand more wage increases. The costs of production will increase even further, as a result, producers will increase the prices of their goods which will fuel more wage increases.

  • Oil prices

Oil prices in addition to the price of raw materials and wages increases the cost of production to a large extent. Petrol and diesel are an important input in almost all industries. Distribution of products from the manufacture, the wholesaler and to the retailors requires the use of transport which requires petrol or diesel if it is road transport. Thus, an increase in the price of fuel will be translated into higher product prices and the overall price level.

  • Fiscal Policy Changes

Another cause of walking inflation is a change in fiscal policy. An increase in the level of tax, be it corporate or VAT can increases the prices of goods and services. This is because an increase in tax has an upward pressure on the cost of production.

  • Production Setbacks

Droughts, natural disasters and temporary exhaustion of resources can also negatively affect the production levels. Shortages of products resulting from such production setbacks will create a shortage in the market which may result in the general increase in prices.

Walking inflation, on the other hand can be associated with growth if it is a result of an increase in aggregate demand. Normally, investment and consumption spending reflect an expanding economy. As long as walking inflation, which is normally a single digit level of inflation, is kept under control it is not necessarily harmful. This is because the market does not automatically respond to an increase in aggregate demand. Overtime, supply will increase to match the increase in consumption and the level of inflation will decrease. It is therefore important for monetary authorities to monitor walking inflation so that it will not develop into running or hyperinflation. Thus, increasing the money supply should be done moderately or at a reasonable rate that matches the average of gross domestic product.

Leave a Reply

Your email address will not be published. Required fields are marked *