Have you ever wondered why the price of an item that you normally buy keeps increasing every other time you buy it? Every month, prices of raw materials keep rising and rising. Companies are forced to increase their prices to keep the profits margin up and employees are also expecting higher and higher wage due to the simple fact that they can’t afford the increasing cost of living. On one hand, companies need to price their goods relatively high to cover increasing cost of raw materials. But at the same time, employees are demanding pay rose since commodities prices are increasing. If the companies increase their employee’s wages, they need to increase the price of their products again, leading to higher prices in commodities. This interlocking effect is the work of inflation and if a country is not cautious, their economy can be severely damaged. In a way, inflation affects everyone living in this world and in today’s economy, not everyone has the same income and purchasing power. When cost of living becomes too high, it would have undesirable effects on us. So how high is too high and how much is too much? Therefore, it is important for us to understand what exactly is causing this constant increase in price and find ways to control it. For the rest of this paper, our analysis is based on an article from The Straits Times dated 25th February 2008, entitled “January inflation may be as high as in 70s oil crisis”. Literature
In this paper, our main objective is to explain the inflation process that is ongoing in Singapore today and our views on how the Singapore government can effectively tackle this situation. The proposed solution is derived by comparing and analyzing the various methodologies used to control inflation. The analysis done in this paper is approached from a micro to macro perspective. Firstly, we will introduce the definitions of inflation, various types of inflation and what causes inflation. Secondly, we will be covering on the global outlook of the economy. Thirdly, on a micro perspective, we will be analyzing factors affecting housing prices and transport prices and how they cause inflation to the economy. Fourthly, we will introduce the four different approaches to control inflation. Following that, by analyzing how Singapore controls inflation, we can propose solutions to suit its economic policy. Next, since the article mention about the 1970s oil crisis, we will analyze how United States control inflation during that period to provide different solution alternatives. Lastly, we will give our recommendation to control the current inflation in Singapore. What is Inflation?
Inflation is defined as the constant, inordinate and general increase in price over a period of time. There are different degrees of inflation, mild inflation, strato-inflation and hyper-inflation. Mild-inflation is defined as inflation with no more than five percent increase in price per annum. This shows a slow rise in price level and often is associated with low level of unemployment. The second type of inflation is strato-inflation, where inflations are in the range of about ten percent to several hundred percent. This type of inflation normally is experienced by the developing countries. Lastly, hyper-inflation is defined as a fast acceleration of price increase that usually leads to the breakdown of the country’s monetary system since the old currency may have to be replaced. Inflation isn’t necessarily bad towards the economy. Most of the countries are aiming to keep inflation at the mild level each year, less than five percent. Having a mild inflation enables the economy to prosper slowly and more jobs will be created thus leading to a higher output. Causes of Inflation
There are two main causes of inflation, demand-pull inflation and cost-push inflation. A demand-pull inflation occurs when the aggregate demand is too high for the aggregate supply, hence, prices increase. Aggregate...