In the past few years, many economies in the world have been affected by inflation. It is important to define inflation on the economic perspective in order to understand its phenomenon. Inflation is the general increase in the price level in the economy of a country (Joseph 3). There are various economic terms that are related to the issue of inflation. For instance, inflation may be brought about by an increase in the aggregate demand. Demand is the quantity of a product or a service a consumer is willing and able to buy at the existing market price at a given time period.
The supply of a commodity also affects inflation in a country. Supply is the quantity of a product or a service a seller is willing and able to sell at the prevailing market price at a given time period. Other related economic terms include deflation, inflation rate, consumer price index and money supply. Consumer price index is a criterion that is used to measure the overall level of inflation in an economy. It is important since it helps economists to plan on the best ways of curbing the existing level of inflation. Deflation is the general decrease in the price level in the economy (Joseph 9). It usually occurs when inflation reverses. Money supply is the circulation of money in the economy. If this increases excessively, it may lead to inflation.
There are various causes of inflation in an economy. There are four major theories that have been formulated by various economists to explain these causes. These theories are; the monetarist, Keynesian, structuralism and the quantity theory of money (Joseph 12). Some of the ideas given in the four theories are similar, although there are also major differences. All these theories are important since they help economists in analyzing the impact of inflation on the economy. The theory that is reflected in the inflation article is the Keynesian theory. According to the article, the inflation level has risen due to an increase in the cost of education. The action of the government to increase cap on school fees has increased the inflation level in the United Kingdom.
According to the Keynesian theory, increase in costs is one of the reasons for increased inflation. This is reflected in this article since the cost of education has risen. Keynesian defined this cause as cost-push inflation. The quantity of commodities offered for sale in the United Kingdom had reduced. This led to a general decrease in the supply of commodities in the country. As a result, sellers increased their prices since they wanted to gain maximum profits. This in turn led to an increase in the general increase in the price level. Keynes also argued that inflation can be brought about by an increase in the aggregate demand that is unmatched by an increase in aggregate supply (Joseph 20).
The theory of inflation, according to Keynes, can also be explained by the use of a graph. The following graph shows how aggregate demand leads to inflation.
The above graph shows the application of Keynesian theory on the issue of inflation. From the graph, we can observe that there is an increase in the aggregate demand that has led to full employment level (Yf). This has happened without any change in the aggregate supply. An increase in the aggregate demand is generally brought about by an increase in government spending as well as a rise in the private investment. The full employment level in the economy is not able to guarantee increased output level. This is the major reason why the aggregate supply level does not increase in response to increased aggregate demand. This causes an increase in inflation (Joseph 26).
According to the article, the inflation level has surpassed the expectations of economists in the United Kingdom. It is therefore important to come up with ways of curbing inflation in the country. Reducing the inflation level should start by working on the factors that have caused the increase in the prices of commodity. According to Keynes, one of the ways of reducing inflation is by reducing the aggregate demand. It is obvious that the government had increased the cap on fees in order to increase its spending. It should reduce this spending in order to induce lower prices in the economy. If the government spent less, there would be less increase in the cap for fees.
In the developing economies, inflation has increased due to overdependence by the government on taxes as revenue. This makes them to charge excessive tax rates on commodities and services offered in their countries. As a result, the sellers shift this burden to the consumers, who pay a higher price (Joseph 27). This leads to an increase in the general price increase. In this case, the government should either reduce its spending or search for alternative sources of revenue to avoid increased inflation.
In conclusion, the government of England should ensure that the inflation level is reduced in order to maintain a stable economy. In doing so, the government should take into consideration the Philip’s curve phenomenon. Philip curve phenomenon states that in reducing inflation, some level of unemployment will be inevitable. The government must therefore set a level that will not adversely affect the general employment level of the country. Finally, there should be proper economic planning in order to prevent any future contingencies brought about by increased inflation.
Work Cited
Joseph, M. Inflation: Causes, Effects and Solutions. London. Palgrave Macmillan. 2012. Print.
