Some theorists claim that inflation can be controlled, using one of the many theories. These theories can be put into two broad categories, According to ‘Business for Higher Awards’ (Dave Needham, Rob Dransfield et al) (page373). This book groups the theories together as (i) Supply-side theories of inflation, and
(ii) Demand led inflation.
The emphasis of the ‘supply-side’ theories is the pressure put on firms into forcing them to raise their own prices by influences such as higher raw material costs and wage increases. However the government can monitor and to a certain extent control wage levels and other supply side pressures, so it is not always the case that these may cause inflation. This theory does not take into consideration that demand may be weak in the economy keeping profits down, and if this is the case then the firms will wish to rebuild their profit margins even if the economy is not at a suitable point for them to do so.
The ‘Demand-led’ theories relate to government spending (and borrowing), credit availability and real disposable incomes. These theories are also not as clear cut as they may seem as a household may experience an increase in both wages and disposable income, but as the future is unpredictable they may wish to ensure they maintain their current level of living conditions and may save the extra income. If this turns out to be a long term arrangement then a ‘feel good’ factor may come into play and they may indeed spend more, but companies cannot predict what individuals do and so this theory can only rely purely on the chance that they may spend this income.
The Problem with these theories is that they focus on one area of what may affect inflation, when there is a multitude of factors, which affect the level of inflation. It is a lack of insight into these factors or the lack of recognition of them which leads theorists into believing that there must be a simple solution to the problem, but as I have stated the only chance of solving or controlling inflation is to encompass all of the factors – which lets face it, the chances of a theorist doing this would be extremely small as most theorists. As no matter what they are studying the theorists always look for the simplest answer rather than looking at the bigger picture, which is why theories remain that way and cannot ever be used in practice without failure.
During the 1980’s the UK government took the view that monetary conditions - i.e. the level of supply of money- was were the main indicators and cause of inflation, which to a certain extent was correct. The policy of the government at this time was aimed at adjusting interest rates to keep both inflation and monetary growth in check. The reasoning behind this was that if monetary policy can control interest rates and/ or the supply of money
Towards the late 1980’s and into the 1990’s the policy changed to the aforementioned Supply and Demand theories, which are flawed but not as drastically as the previous policy. This process is now made publics by means of publishing the discussion between the Chancellor of the Exchequer and the Governor of the bank of England (these illustrate what conclusions they have made and the likely course of inflation, which in turn leads to the decision to tighten or relax Monetary and/ or Fiscal Policy). This method was bound to be flawed as firstly both of the policies deal with how much money is put in and taken out of the economy by the government. However these policies in themselves can only help the economy either boom or go into recession, as firstly money is put into the economy and this creates a boom but if the money is taken out too early then this causes a recession. The perfect example of this is the current state of the economy. The government claim that at the current state everything is looking good but from a sceptical point of view the last quarter of 2001 had 0% growth and so as such suggests that there will soon be a recession. Fortunately there is the Supply/ Demand theory in place which although cannot stop recession it helps control the levels of inflation.
So far I have criticised both of the policies (even though I agree that the current policy is far better than the previous one), you may ask if these theories are not complete then how can the economy continue in this way. Well the economy relies on the markets, which in turn rely on the consumers, which are made up of individuals. And as individuals cannot be predicted the markets cannot be predicted accurately and then in turn the economy is predicted even less efficiently. Thus leading me to conclude that the economy is a phenomenal ‘entity’, which cannot be controlled by any simple means. This also leads me into believing that inflation is a central factor in the economy, and also cannot be controlled. So it must also be a phenomenal ‘entity’, as it fits all of the characteristics of the economy.
The theories, which have presented are sound, in their theory form but without recognition of the other various factors that affect inflation, they will only remain theories, and cannot be put into effect efficiently. However I do not have the space or the time to express any more theories or theorise about these factors any more than I have, however I am sure that somebody will create a theory encompassing all of the factors which may affect inflation sometime in the future, but this but it would probably still be flawed.
So to answer the question, from my research I believe that inflation is a Monetary Phenomenon, which no matter how hard the government try to control it will always beat them. This you may argue is a pessimistic view of dealing with Inflation, However at the moment I feel that it is a valued point of view given that so far any theories, which have been recognised by the government, have been seriously flawed and do not recognise the other factors which may affect inflation. My view is however not singular and there are several books which support my view the one which supports it most effectively is the one previously mentioned (the book in question being ‘Business for Higher Awards’ (Dave Needham, Rob Dransfield et al). So if the government wishes to control inflation it will have to work harder or be beaten every time.
Words: 1469
Bibliography
1)‘Business for Higher Awards’, Dave Needham, Rob Dransfield et al (Heinemann)
2) “Essentials of economics”, J. Slowman, 2nd edition (Prentice Hall)
William Spence 04/05/2007
