Inflation is regarded as a complex situation for an economy. Inflation that exceeds a moderate rate can be disastrous to an economy; therefore, it should be kept under control. The Measures to control Inflation’s main goal is to reduce the inflow of cash into the economy or the market's liquidity. It can be divided into Monetary Measures, Fiscal Measures, and Administrative Measures.

In this article, let us see the idea of inflation control and measures like Monetary Measures, Fiscal Measures, and Administrative Measures.

Basics of Inflation control

• Inflation can be majorly caused due to two reasons. One is the Demand-Pull inflation and the other is the cost-push inflation on the supply side.
• In the case of the demand-pull inflation all the control measures revolve around reducing the demand, this can be done by either reducing the money supply or increasing prices by taxation.
• In the case of cost-push inflation, the control measures revolve around increasing the supply to meet the demand in the market and reduce the prices by providing subsidies and technological expertise.
• In all cases, the inflation control measures can be divided into Monetary Measures, Fiscal Measures, and Price Control.

Monetary Measures

• Monetary policy refers to the central bank's approach to managing the money supply and interest rates through the use of monetary policy instruments under its control.
• The Reserve Bank of India (RBI) Act, 1934 was amended in May 2016 to provide a legal foundation for the implementation of the flexible inflation-targeting framework.
• The primary goal of monetary policy is to keep prices stable (keeping inflation within the target band of 2 percent to 6 percent).

Let us see how the different monetary policy instruments control inflation

Fiscal Measures

• Fiscal policy is the policy by which a country's government controls the flow of tax revenues and public expenditures in order to navigate the economy.
• For example, during a slowdown, the government may decide to spend more on infrastructure projects and other initiatives in order to stimulate the economy. To increase revenue, the government may raise taxes on the wealthy.
• To combat/control inflation, the government employs a variety of fiscal policy measures.
  • Public Expenditure
  • Taxation

Public Expenditure

• It is the amount of money spent by the country's government. For example, the government constructs public infrastructure such as roads, railways, and housing.
• It is an important tool in the fight against inflation.
• When inflation is high, the government reduces government spending. A decrease in public spending has an impact on private investment, resulting in a decrease in aggregate demand.
• For example, during periods of high inflation, the government reduces its spending on rural infrastructure expansion. It will result in a decrease in demand in rural areas.
• Similarly, in the event of deflation, the government increases public spending in order to boost private investment and aggregate demand.

Taxation

• Taxation policy can be used to encourage or discourage household consumption and private investment by raising or lowering the personal income tax, corporate tax, or indirect tax (Such as GST)
• In the event of high inflation, the government may raise personal or corporate taxes in order to reduce household expenditure/private investment. Increased taxation means that people have less money to spend (and private players for investment). This would result in a decrease in aggregate demand and aid in the containment of rising inflation.
• Similarly, in the event of deflation, the government lowers tax rates in order to stimulate household and private consumption, resulting in an increase in aggregate demand.

Administrative Measures

• In addition to monetary and fiscal instruments, the government can use other measures to maintain price stability and control inflationary price rises in the economy.
• Other measures include direct price controls, restrictions on speculation and hoarding, the use of buffer stocks, a ban on exports, imports to supplement domestic supply, and a prohibition on commodity futures trading.

• Price Control Through Direct Action
  • Under the Essential Commodity Act of 1955, the government can declare a commodity to be an essential commodity in order to ensure that it is available to the public at reasonable prices.
  • The Drug Price Control Order (DPCO) aims to keep pharmaceutical prices under control.
• Examine Speculation and Hoarding
  • The Act to Prevent Black Marketing and Maintain Supplies of Essential Commodities, 1980 – This act authorizes the central government or a state government to detain individuals who engage in activities such as hoarding, creating artificial scarcity of essential commodities in the market, and price rigging.
• Policy on Buffer Stocks
  • The Government of India has maintained buffer stocks of food grains to cover any unanticipated situation. Food Corporation of India is in charge of purchasing, storing, moving, transporting, distributing, and selling food grains and other food items.
• Ban on Exports
  • The Government of India imposes a Minimum Export Price (MIP) to discourage commodity exports and ensure their availability in domestic markets.
• Ban on Commodity futures trading
  • To reduce speculation-driven price increases, governments frequently prohibit future trading in commodities (e.g., the government prohibited future trading in chana, etc.).

Conclusion

Inflation in a regulated manner is good for the growth of the country. However, if it's not under control then it will spiral cause hyperinflation, and lead the economy to a vicious cycle. Therefore necessary measures are designed both by the central bank and the government to keep it in check.