There are several steps to effectively control inflation before it gets out of hand. Given that inflation shows the imbalance between supply and demand of goods at current prices so that measures be taken to reduce demand or increase supply of goods and services. The following are some important steps you should take into demand and supply.
The supply side
The supply of goods and services can be increased by increasing agricultural and industrial production. Agricultural production can be increased by providing an adequate supply of agricultural inputs at low prices, the modernization of agriculture and scientific farm management, adequate water supply for irrigation, industrial production etc similarly can be increased by increased foreign direct investment, industrial credit growth, fiscal concessions, etc.
Control of illegal Activities
There are some illegal activities that cause significant inflation in a country. It is hoarding, smuggling, profiteering, black markets, etc. In the case of smuggling of large quantities of staples like sugar, butter, wheat, rice, etc are exported abroad illegally in order to obtain higher prices. Similarly, the shortage in most cases artificial staples to create higher profits. All activities of this evil must be controlled through advertising, as well as punishment.
Peace and Security
Production and distribution of goods and services can be effected due to the existence of unease and insecurity in society. In such circumstances, investors hesitant to invest for fear of potential loss. Similarly, the production of industrial products is affected due to several unpleasant events such as strikes public etcpor therefore peace and security must be ensured to maintain the supply of goods and avoid the danger of famine.
Main Energy Sources
The supply of agricultural and industrial products is highly dependent on energy availability. If the energy source is expensive, the cost of production of goods and services will be expensive too. Increased production costs raise prices and cause inflation. Therefore all necessary measures be taken to provide major sources of energy in industrial and agricultural sectors of the economy.
The demand side
Control of Money Supply
The money supply has a great influence on the rising inflation that is, inflation with increasing the money supply and vice versa. Therefore, to control inflation, measures must be taken to control the money supply. The money supply can be controlled with the help of monetary policy in which the central bank uses various methods, such as bank rate policy, open market operations, changes in reserve requirements, credit rationing , direct action etc. All these methods are useful to control the rate of inflation in a country.
There is no Deficit Financing
Deficit financing shows that public spending beyond their income. The purpose of deficit financing is to meet the additional costs that the budget deficit. Because the money supply increases in the country and causes inflation. Therefore the deficit financing should be discouraged and all development costs must be met through taxes and debt.
[large]In most developing countries, the population is increasing very quickly that the production of goods and services does not increase at the same pace. Because the imbalance between supply and demand of goods and services are produced and cause inflation. Therefore, to control inflation, appropriate measures should be taken to control the population.
Fiscal policy refers to government policy of public spending and taxes. The main fiscal policy objective is to maintain only the slight change in the general price level. During inflation, the government tries to reduce its expenditure on unproductive activities and the direct tax rate increases so that the purchasing power of the population is reduced. Due to the reduction in the purchase of the population, demand for goods and services will be reduced and controlled inflation.
There are several other options available to the government to control inflation and wage and price freeze, the rationing of goods, establishment of public service shops, the price review committees, boards of price stabilization, etc. This direct measures are often used by the government to control inflation.