Measures to control inflation
An inflationary situation can effectively be addressed/tackled if the cause is first and foremost identified. Governments have basically three policy measures to adopt in order to control inflation, namely:
Fiscal Policy: This policy is based on demand management in terms of either raising or lowering the level of aggregate demand. The government could attempt to influence one of the components C + I + G (X - M) of the aggregate demand by reducing government expenditure and raising taxes. This policy is effective only against demand-pull inflation.
Monetary Policy: For many years monetary policy was seen as only supplementary to fiscal policy. Neo-Keynesians contend that monetary policy works through the rate of interest while monetarists' viewpoint is to control money supply through setting targets for monetary growth. This could be achieved through what is known s medium term financial strategy (MTFs) which aims to gradually reducing the growth of money in line with the growth of real economy - the use of monetary policy instruments such as the bank rate, open market operations (OMO) and variable reserve requirement (cash & liquidity ratios).
Direct Intervention: Prices and incomes policy: Direct intervention involves fixing wages and prices to ensure there is almost equal rise in wages and other incomes alongside the improvements in productivity in the economy. Nevertheless, these policies become successful for a short period as they end up storing trouble further, once relaxed will lead to frequent price rises and wage fluctuations. Like direct intervention, fiscal and monetary policies may fail if they are relied upon as the only method of controlling inflation, and what is needed is a combination of policies.