There are various measures to control the inflation effectively before it gets out of hand. Since inflation shows disequilibrium between demand and supply of goods at current prices therefore measures should be taken either to decrease the demand or increase the supply of goods and services. Following are some of the important steps which needs to taken on both demand and supply side.
On supply side
Increase in output
The supply of goods and services can be increased by increase in the agricultural and industrial production. Agricultural production can be increased by providing adequate supplies of farm inputs at low prices, modernization of agriculture and scientific farm management, adequate supply of water for irrigation etc. similarly industrial production can be increased by increasing direct foreign investment, increase in industrial credit, tax concessions etc.
Control of illegal activities
There are some important illegal activities which cause inflation in a country. These are hoarding, smuggling, speculation, black marketing etc. In case of smuggling, large quantities of essential items such as sugar, ghee, wheat, rice etc are exported to the foreign countries illegally in order to get higher prices. Similarly in most cases artificial scarcity of essential items is created to get higher profits. All such evil activities should be controlled through publicity as well as punishment.
Peace and Security
Production and distribution of goods and services can be effected due to the existence of unrest and insecurity in the society. Under such circumstances, investors hesitate to invest due to the fear of potential loss. Similarly the production of industrial products is affected due to various unpleasant events such as public strikes etc. therefore peace and security should be insured to maintain the supply of goods and avoid the danger of scarcity.
Chief Sources of Energy
The supply of agricultural and industrial products is heavily dependent upon the availability of energy. If the source of energy is expensive then the cost of production of goods and services will be costly as well. Increase in the cost of production will boost the prices and causes inflation. Therefore all necessary steps should be taken to provide chief energy sources to the industrial and agricultural sectors of economy.
On demand Side
Control of Money Supply
Money supply has great influence on the inflation i.e. inflation increases with the increase in money supply and vise versa. Therefore in order to control the inflation, steps should be taken to control the money supply. Money supply can be controlled with the help of monetary policy in which central bank uses various methods such as bank rate policy, open market operations, variation in reserve requirement, credit rationing, direct action etc. All these methods are useful in controlling the inflation rate in a country.
No Deficit Financing
Deficit financing shows that government expenditures exceed its revenues. The purpose of deficit financing is to meet he additional expenditure in deficit budget. Due to which the supply of money increases in country and causes inflation. Therefore deficit financing should be discouraged and all the developmental expenditures should be met through taxation and borrowing.
In most of the developing countries, population is increasing very rapidly whereas production of goods and services is not increasing at the same pace. Due to which imbalance between demand and supply of goods and services occurs and cause inflation. Therefore in order to control the inflation, appropriate steps should be taken to control the population.
Fiscal policy refers to the government policy of public expenditure and taxes. The main purpose of fiscal policy is to maintain only mild change in the general price level. During inflation, the government tries to reduce its expenditure on unproductive activities and the rate of direct taxes is increased so that the purchasing power of people is reduced. Due to the reduction in purchasing of people, the demand for goods and services will be reduced and inflation will be controlled.
There are various other options available for the government to control inflation such as freezing of prices and wages, rationing of goods, establishment of utility stores, price review committees, price stabilization boards, etc. These are direct measures and are often used by the government to control the inflation.