Controlling Inflation

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INTRODUCTION

Of the various ills the economy can face, inflation is simultaneously the worst for society as a whole. Inflation can be defined as the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling (investopedia.com). Inflation is a sustained increase in the general level of prices. Since inflation is concerned with increases in the general level of prices, changes in the price of a single good or service cannot be characterized as inflation. The inflation rate is normally measured by percentage changes in the cost of a basket of consumer goods and services (central bank). Inflation in Trinidad has been fluctuating, as stated in the article Inflation rises to 5 per cent, found in the Saturday Guardian on the 27th February, 2010.

The article gave the information given in the report done by the Central Statistical Office; it stated that headline inflation rose by 3.7 per cent in the 12 months to January 2010 from the 1.3 per cent a month earlier. Food price inflation rose by 2.7 per cent on a year on year basis in January following a decline of 0.2 per cent in December 2009. Core inflation which excludes the impact of food prices, rose to 4.2 per cent (year on year) in January from 2.2 per cent in December. On a monthly basis, core inflation rose by 2.2 per cent in January 2010, following an increase of 0.1 per cent in December 2009 and three consecutive monthly declines.

So we clearly see that inflation is present in the economy, and from the article it is quite unpredictable. What we need to ask ourselves is how we can deal with inflation? What we can do to make inflation easier? What can the government do what will the Central Bank do to deal with inflation?

THE QUESTION

INFLATION IS ON THE RISE, SO WHAT CAN BE DONE BY THE CENTRAL BANK OF TRINIDAD AND TOBAGO TO CONTROL INFLATION?

LIMITATIONS/ CHALLENGES

-My first challenge was that it was quite difficult to find an article that was appropriate, and dealt with the topics being covered this semester. -It was also a bit difficult to make sense of the article, and then to find literature to support it. Literature was found but making the link was quite difficult.

LITERATURE REVIEW

Austrian economists maintain that inflation is by definition always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.

Ludwig von Mises (cited in Wikiedia, 2010), the seminal scholar of the Austrian School, asserts that: “Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

Inflation is always and everywhere a monetary...
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