Economywatch - Inflation a necessary evil

As long as our governments and monetary policy authorities constantly try to keep it moderate or from getting hyper and galloping so that it does not devastate the income and savings of people - especially the salaries and wages of workers, inflation can be deemed necessary.

This is not to say the 18% rate of inflation the economy of The Gambia is presently grappling with is a good omen. The fact remains that the authorities have been applying necessary measures to suppress or control inflation so that it does not hit severely on consumers and the economy.

Owing to some adverse world conditions including the twin shocks of the Covid-19 pandemic and the Russia-Ukraine war, the Gambian economy suffered a decline in growth of the country’s gross domestic product (GDP), which is the market money value of the goods and services produced by the economy in a period of time, say a year or a quarter.

“Added to high global food and energy prices, strong domestic demand strengthened inflationary pressures in the country,” the 2024 National Budget states. “Inflation reached a record-high level of 18.5 percent (year-on-year) in September 2023, but this has reduced to 18.05 percent in October 2023.

“This macroeconomic environment makes fiscal policy management and consolidation efforts more difficult as the Central Bank of the Government increased its policy rate to curb inflationary pressures.”

It has long been noted - indeed it is - that inflation is caused by several factors, both market driven and artificially engineered  (orchestrated). Many factors are said by economists and financial analysts to be responsible for inflation, which is a persistent rise in the price level.  Among the factors said to be responsible for inflation, four stand out clearly. These are demand-pull inflation, cost-push inflation, structural inflation, and social inflation.

Demand-pull inflation occurs when the total demand for goods and services exceeds the available supply of goods and services in the short run.

Cost-push inflation occurs when material costs do increase for some reasons, forcing producers to also increase the prices of their finished goods and services in order to protect their profit margins. And the rising prices in effect will decrease the purchasing power of wages.

Structural inflation arises when there is a substantial shift in demand to the products of one industry away from other industries, giving rise to the increase of the prices of those highly demanded products.

Social inflation results from the increasing demand for more government services in the form of higher Social Security payments, improved unemployment benefits, the distribution of more welfare, wider health care coverage, better rent subsidies, and a host of other social services.

There is a very common one now, I must cite, that is seriously affecting least developed countries such as The Gambia. This is foreign exchange rate, which is the reduction in value of the local currency against the almighty trading currencies such as the Dollar, the Euro and the Pound Sterling.

And a high level of inflation caused by any of these factors can seriously harm the economy, growth and development efforts of governments, as well as the pockets and savings of individuals, corporate bodies and other institutions.

In the ensuing negative spiral flow of price rise, it is the poor man, the lay man, the salary earner, who struggles to eke out a living each day to get his hand-to-mouth existence, that extremely feels it, as food bill, water bill, light bill, house rent and other essentials of life continue to rise rapidly over a short period of time.

But if the speed of price rise and cost of living is controlled by authorities of the central bank and the government  - such as maintaining inflation at a level economists describe as creeping or moderate - inflation can be considered necessary for national growth.

Why is some inflation good? In the absence of inflation, there is also what is called deflation - which is a reduction of the supply of money in an economy, and therefore a reduction of economic activity, which leads to job loss and unemployment since businesses will experience less economic transactions or activities and eventually economic recession. This situation forces the government and the central bank to come in again with supply of money into the system, to spur  expenditure, which leads to inflation.

To maintain a thriving economy, therefore,  economists and financial analysts subscribe to the fact that some level of inflation is always necessary, even though the people - the consumers - would always detest price rise and inflation.

This is how Sarah Sharkey, a Florida personal finance writer, explains it:   “Inflation isn’t always a bad thing,” she says. “In fact, the Fed [the US Federal Reserve Bank] considers a modest amount of inflation as a key indicator of a healthy economy. As a benchmark, the Fed strives to keep inflation at the 2% mark. This measure aims to keep the economy growing at a healthy pace.

“The Fed uses several tools to accomplish its goal, including setting the Federal Funds Rate. When inflation is rising, the Fed increases interest rates to cool inflation.

“When inflation is low or the economy is in a recession, the Fed lowers interest rates with the hope that potential borrowers will be enticed to take out loans. For example, buyers might be enticed to buy a house or do a cash-out refinance to undertake home renovations. All of these choices help to fuel economic growth.

“On the opposite end of the spectrum is deflation, which happens when the cost of goods or services falls over time. At first glance, this might seem like a reprieve to consumers. But deflation is sometimes fueled by a lack of demand, which can eventually cause unemployment to rise.”  

The bottom line, according to Sarah:  “Like almost everything else, inflation is good in moderation. Although a low level of inflation is often good for an economy, high levels of inflation can make life more difficult for many.”

In The Gambia, the Central Bank has always been applying several tools to control inflation to keep the economy thriving. The CBG and the government may among other measures effect the following to  control inflation: contractionary  monetary policy, open market operations, reserve requirements of banks, discount rate, and bank-to-bank lending rate.