(b) Cost-Push Inflation

Similarly, for the monetarists, ‘cost-push’ is not a truly independent theory of inflation—it has to be financed by some extra money (which is created by the government via wage revision, public borrowing, printing of currency, etc.). A price rise does not get automatically reciprocated by consumers’ purchasing. Basically, people must have got some extra purchasing power created that’s why they start purchasing at higher prices also. If this has not been the reason, people would have cut-down their consumption (i.e., overall demand) to the level of their purchasing capacity and the aggregate demand of goods would have gone down. But this does not happen. It means every cost-push inflation is a result of excessive creation of money—increasing money flow or money supply.

For the monetarists, a particular level of money supply for a particular level of production is healthy for an economy. Extra creation of money over the same level of production causes inflation. They suggested proper monetary policy (money supply, interest rates, printing of currencies, public borrowing etc.), to check situations of inflationary pressure on the economy. Monetarists rejected the Keynesian theory of inflation.

3. Measures to Check Inflation

From the above-given reasons for inflation and the measures to control it, which

of the measure the governments of the world should apply in their policymaking? In practice, governments around the world distance themselves from this debate and have been taking recourse to all possible options while controlling inflation. The governments resort to the following options to check rising inflation:

(i) As a supply side measure, the government may go for import of goods which are in short-supply—as a short-term measure (as happened in India in the case of ‘onion’7 and meeting the buffer stock norm of wheat). As a long-term measure, governments go on to increase the production to matching the level of demand. Storage, transportation, distribution, hoarding are the other aspects of price management of this

category.

(ii) As a cost side measure, governments may try to cool down the price by cutting down the production cost of goods showing price rise with the help of tax breaks—cuts in the excise and custom duties (as happened in June 2003 in India in the case of crude oil and steel8). This helps as a short-term measure. In the long-term, better production process, technological innovations etc., are helpful. Increasing income of the people is the monetary measure to avoid the heat of such inflation.

(iii) The governments may take recourse to tighter monetary policy to cool down either the demand-pull or the cost-push inflations. This is basically intended to cut down the money supply in the economy by siphoning out the extra money (as RBI increases the Cash Reserve Ratio of banks in India)9 from the economy and by making money costlier (as RBI increases the Bank Rate or Repo Rate in India)10. This is a short-term measure. In the long-run, the best way is to increase production with the help of the best production practices.‌

Again, this measure does not work if the price rise is taking place in items of everyday use such as salt, onion, wheat, etc. (because nobody purchases such goods by borrowing from the banks). This measure helps if the prices are rising due to extra demand of cement, iron and steel, etc.

The governments might utilise any of the above or all the three measures to check and manage inflation in their day to day price management policy.