INFLATION

Inflation refers to a persistent rise in the general price level as a result of too much money in circulation. The prices of most goods and services rise steadily but not necessarily at the same rate. During an inflationary period, there is too much money in circulation, and 'too much money chases fewer goods and services'. In other words, a larger quantity of money purchases fewer commodities. The value of money therefore falls during inflation.

     When inflation involves a slow but steady rise in the general prices level, it is referred to as creeping or chronic or persistent inflation. But if the price level increases at a very rapid rate, it is referred to ask galloping or hyper inflation.

Note

(i). Periodic price increases (which do not persist) are not regarded as inflation. periodic increases and falls in the general price level lead to a condition of 'price instability'.

(ii). A persistent rising prices deliberately caused by government is known as reinflation. 

Types of inflation

1. Demand pull inflation: this type of inflation emanate from excess of demand over supply. if the demand for goods and services increases considerably without a corresponding increase in their supply, prices will increase. If the price increases persist, inflation will result. For example, an increase in income will increase the purchasing power of people. But if this is not matched with increased production, inflation will occur. Demand-pull inflation is associated with periods of trade boom.
2. Cost-push inflation: This type of inflation is generated by increases in the cost of acquiring the factors of production. Walker's May demand higher wages; the cost of capital and land may have increased, generally. Producers are forced to pass part of the higher cost to consumers in the form of higher prices, in order to maintain their profit margins. If the price increase persists, inflation.
   
3. Open inflation: This is a type of inflation generated by an increase in money supply without a corresponding increase in the volume of goods and services. Therefore, too much money 'chases' if you are good, resulting in a rise in the general price level. These could be brought about by excessive Bank lending all over expansion of currency by the central bank. 

Causes of inflation in West Africa

1. Excessive deficit financing and rapidly increasing government expenditure: there is deficit financing by government if it spends more money than it receives through tax and other sources. In order to finance the various development project, the government could borrow more money, or the central bank will print more money to meet government expenditure. Sometimes money is spent on project which are non productive. These increases the amount of money in circulation. If the increasing amount of money is not matched by increase productivity, prices will increase. In Nigeria, increased government expenditure was a major cause of inflation in the late 1970s.
2. Excessive Bank lending: excessive creation of bank credit increase the supply of money. If the increased supply of money is not matched by The increased supply of commodities, prices will rise. If it persist, inflation will result.
3. Increases in wages and salaries of workers: Trade unions are on a constant fight for increased wages and salaries. So many wage review commissions have been set up. In Nigeria, for instance, the salary of workers have been on a constant increase due to the influence of the various trade unions. Salary review commissions such as those of Adebo, Udoji, etc have a recommended salary increases in stock in 1981, there was an upward review of worker's salary in Nigeria following the introduction of minimum wage act. Sometimes, the higher wages are not matched by increased productivity. Consequently, the increased earnings results in excess of demand over supply. Hence, prices rise. Sometimes when businessmen see that workers salary have been increased, they push up the prices of their goods.
   
4. There is low domestic productivity in both the industrial and agricultural sectors: because of the problems associated with the industrial development such as lack of capital, lack of adequate manpower, poor infrastructure, ET cie the production goods is handicapped. There is shortage of supply relative to demand and prices of manufactured goods are high.
   
5. Poor storage facilities: This is especially true of agricultural products. Lack of adequate storage facilities for perishable cropssuch as tomato, oranges, yams, plantain, etc. Cause much of these crops get spoiled and be wasted. There is there for the tendency of these products to be very scarce during of seasons. There prices are therefore high during the off-seasons. Their prices are therefore high during the periods Of shortage of supply. The rise in price May persist for some time.
6. Population increase: in many West African countries, the rate of population growth is very high. This means increased demand for goods and services since the number of consumers increase.               The higher demand brought about by high population growth rate is not matched by increased food supply. Food supplies tend to decrease in the face of the rural urban migration, destruction of paste etc. Hence, there is an increase in prices.
7. There is also a shortage of essential item brought about by poor distributive system and Port congestion:in many West African countries there is inadequate development of transportation Network. Some areas are almost inaccessible. For distributive system result in a shortage of commodities in areas where they are needed. Prices are therefore high.         A poor distributive system may also result from the presence of too much middleman between producers and consumers. Sometimes the middle man hoard their goods in order to raise prices. Again, because of the presence of too many of them before goods reach consumers, there prices become very high. Port congestion also result in a scarcity of imported items and their prices rise.
8. War and civil strifes in some West African countries: during the time of war, efforts are concentrated on the production and purchasing of war equipment. The priority is winning the war. The production of many essential commodities become neglected. Also, the frequent civil strife diverts attention of the government and producers for the production of consumer goods to the maintenance of law and order. As a result of all these, there will be a shortage of essential commodities.                                Again, the government may print more money to finance the war. There will be therefore more money available than there are essential items. Price therefore increases.
9. Sometimes, inflation in West African countries is 'imported': the great reliance on imported items by many countries as a result of low domestic production could lead to imported inflation. Inflation in the western world and some other countries from where these commodities are imported result in the higher landing prices of such goods. This could therefore generate inflation within the economy sinc such goods have to be sold at higher prices.
10. Higher cost of production: The prices paid by producers for labor, land and capital goose have been on the increase. They pay me my wages call my rent, and interests. They, therefore, increase the prices of these goods and services in order to maintain their profit margins and inflation occurs.
11. Reduction of imports: A number of measures have been used to control imports such as outright bans, use of quotas etc. These lead to scarcity of these commodities and the prices of the locally-manufactured substitutes are high because they are scarce. 

Effects of inflation

Inflation has both desirable and undesirable effects.

1. leads to increased learning and higher profits on the part of businessmen. Because of the increase in the prices of goods and services, they earn higher revenue. they make very high profits, especially at the initial stage, when wages and other costs are still lagging behind output prices. 
   
2. There will be increased investment: the higher profit made by businessmen encourage them to increase the level of investment in order to produce more and Mick still higher profits. Verizon prizes an increased profits expectation act as a boost to the business confidence, especially if the if inflation is moderate and expected to continue for a long time. They invest more to take advantage of the situation. The increased investment leads to increased output.
3. there will be increased employment. Business expansion which is encouraged by inflation (especially miid inflation) leads to greater employment of the factors of production. More label and other factors of production will be employed, they by reducing the rate of unemployment in the economy. Factors of production which were working below capacity will now be used to full capacity.
   
4. there is a transfer of real earnings from creditors to debtors. Borrowers and those who pay rent and fixed interest charges gain. there is a fall in the real value of loans to be paid and the burden of making fixed payment is made lighter by inflation. In real terms (in terms of what money can buy) diburros replace less than he borrowed, and those who make next payment such as rent and interest paid less. This is why investors may be encouraged to borrow more money to expand business since interest to be paid will have a lower value.                                              On the other hand, creditors will lend us on those who receive fixed payment (rent and interest) on their assets lose. This is because the value of the money which they receive will be less than they were receiving before inflation. Lending may therefore be discouraged.
   
5. Inflation redistributes income. people on fixed incomes such as teachers, judge, pensioners, etc. so far have you dakshin in their real incomes. The amount of goods and services which day are income camp I will fall because of a fall in the value of money. They may be there for be a fault in their standard of living since they may no longer be able to consume as much in the way of goods and services as they will consuming before inflation. The peasant become worse off during inflation.                                         On the other hand, inflation favors shareholders, businessmen, and others whose incomes are not fixed as well as some workers who are privately employed. They become better off. Inflation therefore redistributes income from the salaried workers and peasants to businessmen, enterpreneur and shareholders.
   
6. Inflation may lead to an adverse balance of payments. during inflation increases in domestic prices affect the prices of exports, but the prices of imports become relatively cheaper. Inflation tends to encourage imports and discourage exports. the country may spend more money on imports than is received from exports. The balance of payments position may be worsened.
   
7. Inflation reduces the burden of national debt. The real value of money borrowed by the government falls. This is equivalent to a reduction in the national. 
8. A prolonged high rate of inflation may lead to loss of confidence in the country's currency and a consequence collapse of the monetary unit. This was the case in Germany in 1923 when the German Mark become worthless due to Galloping inflation. It was used as wallpaper for decorating houses since it had little or no value. The people preferred to use cigarettes which are relatively scarce as money until a new currency was introduced.