Causes and Cures of the Inflation That Ravages Consumers in Somalia
What Are the Sources of the Inflation?
Inflation is when prices increase generally all in the domestic markets. It is not only contained to Somalia but, it is an economic phenomenon that large countries had been contending all in the last decade. Inflation flowed the populist policies that developed countries taken to close the recessionary gap resulted from the 2007 recession. Inflation is very unfavorable as it pressures to consumers where deflation bothers the producers, producers and consumers are two groups that governments stand to protect.
Global interdependence makes all the markets interact where the increase of the price of one country leads general increase of prices of another country. Somalia Relies to world production as most of the consumer and capital goods are imported from overseas. Domestic prices are extremely dependent on the exporting country’s price, hence inflation in Somalia can be referred to import inflation.
Economic policy makers should have an understanding regarding the true causes of inflation before they jump to the causes of inflation. Adam Smith once said that economic policy should be contextual that bases on the current observation and the institutional circumstances. Many economic factors contribute to inflation and as by nature, economic variables are interrelated that causes one another. This is one reason that earlier economist like Ricardo had employed on the Abstract methodologies with theoretical structures to analysis economic variables.
Inflation stabilization and control policies taken proposed by government of Somalia and some the regional authorities- Somaliland and Punt land, can only suppress the inflation symptoms but does not cure the inflation itself. Policy makers in these states need to know the underlying condition of the inflation which are not in dispute between the economists. Inflation condition can be one of these forms:
a) When aggregate expenditure expands faster than the increase of the supply goods and service in the economy. This expansion permits price levels to rise and absorb the increments of the aggregate expenditure. In other words, when people can spend more than that markets can supply, the result will be inflation. If that is the case in the Somalia, inflation can be adjusted by increasing the production of the country.
b) Expansion of aggregate demand that results from the rise of the government spending or cyclical upsurge of private demand. Again, if the increase of demand is greater the demand of the supply of goods, the result will be price increase and inflation. In this case, government spending should be reduced and supply of goods should be increased to tackle the inflation.
c) The expansion of aggregate expenditure and the aggregate demand can only take place when money supply in the economy is greater the money demand. Excess money results an expansion of aggregate demand.
Remember, the output is a real factor that does change in step with monetary change. Referring to this situation, Nobel prize winning Milton Freidman once said, “inflation is always and everywhere monetary Phenomenon”. Milton studied the correlation between the money supply and over output and inflation. This is an issue that economist widely disagree, Keynes assumed the money neutrality agreeing with classical(s) that money does modify the output and the employment level. This debate is beyond the scope of the text.
Requirement of Price Stabilizing Policy
Inflation targeting is meant to be monetary authority targets inquest of price stabilization. A Contractionary monetary policy that targets inflation, cut the income to reverse the aggregate demand. This practice reduces the inflation, but also leads to unemployment. Monetary economists strongly suggest that any step taking to reduce inflation should be taken with caution. Following are the necessary conditions for inflation targeting:
a) Central banks mandate, instrument autonomy and apparatus for ensuring its accountability
b) Macroeconomic stability that ensures countries fiscal and external position
c) Financial system stability and the well-organized financial markets
d) Institutional elements such as better understanding of how monetary policy works, capacity to forecast the inflation and subordination of exchange rate objectives.
Unless these prerequisites are well met, any policy that government takes to ensure price stability can only enhance peoples’ expectation and shows of that government steps in to control inflation, but, nominated goals are far yet to achieve.