Money Inflation And Deflation money is declining

Inflation is a situation in which the value of money is declining or when the average price level rises. Inflation occurs often as a result of increase in the existing quantity of money without a corresponding increase in the available quantity of goods in the economy. Since too much money is used to exchange few quantity of goods and services, therefore a unit of money will buy less quantity of goods.
The following section will discuss types, causes, effects and control of inflation.

Types Of Inflation
Before we discuss the types of inflation, it is note worthy that inflation is classified on the basis of its causes:

i,) Demand-Pull inflation
This is caused by increase in aggregate demand, due to increase private and government spending. It is also referred to as “Wage Inflation”. This is because rising prices make workers to demand for increased wages and when granted will increase the purchasing power of workers. Eventually, increased spending on the part of workers lead to inflation or increase in general price level.


ii,) Cost-Push inflation

It is also known as “Commodity Inflation”, or “Supply Shock Inflation”. This is caused by a drop in aggregate supply (potential output), which leads to increases in prices of
commodities. This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in supply of oil, leading to oil prices increases, can cause cost- push inflation because producers for whom oil is part of their cost could then pass this to consumers in the form of increased prices.

This is also known as monetary inflation. This usually occurs from changes in money supply, which bring about changes in price level. For example, increased supply ofmoney can make people to have more cash at their disposal, which may lead to a fall in value of money since more quantity/units of money is spent on the same quantity of commodities, leading progressively to inflation.

Also known as “Runaway Inflation”. It occurs when price level suddenly increases rapidly over a short time period, for example, price level can double in a month or less, which may lead to breakdown in a country’s monetary system.


It is also referred to as “Out of Control Inflationary Spiral”. The consensus view is that, this long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Hyper inflation also occurs if inflation get totally out of control (in the upward direction).

 It can grossly interfere with the normal working of the economy, hurting its ability to supply goods. It can lead to abandonment of the use of the country’s currency, leading to inefficiency of barter. It is mostly evident when government finance spending in crisis, such as civil war, by printing money excessively. Hyper inflation usually occurs during or soon after a war, when government turns to the printing press (Central Bank) to create money to pay its debts or invest in the economy. It is usually short-lived, and should not be regarded as typical of inflation. Examples of countries that have experienced this type of inflation are Germany, China and Hungary.

(vi) Foreign Exchange Inflation
This happens when local currency falls dramatically against other World’s currencies, thereby sharply raising the prices of imported goods and hence overall price level.


Causes Exchange Inflation

Inflation is an economic imbalance or disorder which can be due to variety of reasons or causes such as stated below.

(i) Excessive Demand or Demand Pull
Over time, the demand for goods and services by Nigerians (West Africans at large) have been rising consistently especially for foreign imports whereas there has been no remarkable increase in the supply of these goods and services to offset the excessive demand. Consequently, the price level kept rising consistently. For example, in Nigeria, the Udoji Award (increase in wage rate) and the Oil Boom jointly resulted in higher levels of income. This increase the level of prices due to increases in demand for goods and services.

(ii) Creation of Artificial Scarcity of Goods
During the period when import licences were being given Out for the purpose of importing goods, majority of those who got import licences and imported goods were hoarding such goods. This occurrence resulted in higher inflation within the economy.

(iii) Inadequate Supply of Goods
Non-availability of foreign exchange with which to pay for the expanding imports of the country and port congestion problems resulted in inflation within the economy. Likewise, the inadequate supply of raw materials for local industries may result in their producing at a very low capacity; consequently, there will be a reduction in the available goods and services. Resultant effect of this will be a rise in the price level or inflation.

(iv) Cost -Induced Inflation
if cost of labour (i.e. wages and salaries), cost of land (i.e. rent) and cost of capital or raw materials increases, this will lead to a higher cost of production. Consequently, the higher cost of production will affect the price of the goods and services, thereby resulting in inflation or general increases in price level.
Furthermore, general increase in the prices of imported commodities, especially those that serve as raw materials result in general increases in the price level of these commodities within the importing country.

(v) Inflation Induced by Increased Bank Lending
Whenever commercial banks, financial houses and even merchant banks increase the rate at which they grant credit to their customers without a commensurate increase in the level of deposits being made with the banks and financial houses, coupled with little or no increase in goods and services, this results in a situation whereby too much money will be in circulation being used in exchange for few commodities. This will result in inflation.

(vi) Structural Rigidities
These occur as a result of some rigid difficulty to change structures of the economy. For instance, wages, salaries are sticky downwards, that is, they can not be easily reduced; especially when patterns of demand and costs change, real adjustments in price and wages/salaries occur more slowly. This may result in perpetrating inflation.

(vii) Expectations-Induced Inflation
If consumers have high expectations of price or producers have high expectations of wages or salaries increases or increases in the prices of other factors of production. There is the tendency for consumers to demand more of such commodities and for producers to increase prices of their goods and services thereby resulting in price increases. Consequently, inflation occurs.