Inflation has been variously defined
as a persistent rise in the general price level. Inflation is not measured by
increase in the price of one or two household commodity but a general increase
in the price level of the economy (Noko, 2011). Inflation has become a
household word in Nigeria. It is no longer strange to student or a new jargon
to petty trader in the market. Hardly any Nigeria citizens are affected by
inflation. Uncontrolled can dislocate the economy and cause social upheaval.
Inflation in economics is defined as
a condition at which supply persistently fails to keep pace with the expansion of
demand. It is a state of disequilibrium where too much money is chasing too few
goods (Okoro, 2009) Aekley (1961) has said that inflation is a persistent and
appreciable rise in the general level or average of prices”. Aekley viewed it
as a state of disequilibrium that needs a dynamic analysis rather than static
analysis. In the word of Varsh (2005), inflation is a sustained rise in the
general level of prices brought about by high rate of expansion in the
aggregate money supply. According Jean Bodin crude quantity theory of money, he
argue that if money increase by x% there inflation will increase by x%.
This was further
echoed by Professor Iruing Fisher, that what cause inflation in an economy is
not only money supply but also velocity of circulation. He uses his equation of
exchange (MU = PQ) to explain this concept clearly. An increase in money income
without any corresponding increase in productivity, resulting in increase of
the aggregate demand for goods and services which cannot be met at the current
level by total available supply of goods and services in the economy, this will
facilitate the dominance of inflation in such economy (Noko, 2011).
It is possible to have fluctuation
in prices of certain commodities, like agricultural commodities, because of
shortfall in supply due to seasonal factors. This is not inflation, one general
way by which people notice inflation is that once triggered off, the price
increase tends to be general, affecting practically all prices, and it is
continuous. Inflation is a worldwide phenomenon, the most serious in history
being the hyper – inflation of Germany in the 1939s. The resultant effect was
the general loss of confidence in the German money and one of the worst evils
of inflation, as we shall shortly, is that it deprives money of it services as
a store of value. In the midst of the world wars and immediately after, a
number of world economies suffered severe inflation. Hyperinflation in which
the astronomical rise in prices makes money worthless to hold was experienced
in Germany in 1923, in Hungary in 1947 and China in 1959, in which it was
lunatic of a person to hold money for the precautionary and speculative
motives.
Varsh (2005) has noted
that the climax of hyper inflation is reached when the flight from currency
becomes fantastically high causing the velocity of money in circulation to move
towards infinity. A number of measures are adopted by the monetary authority in
controlling conservative and sustainable monetary policy. Central bank had
relied on intermediate targets like monetary aggregates, which most advanced
countries gave up and adopted a frame work of monetary policy known as
inflation targeting. This is on the premise that the main objectives of
monetary policy is to attain and preserve a stable rate of inflation.
This been successful
in advanced countries in maintaining price stability and requires in dependence
of central banks from government control as first requirement, allowing the
monetary authority to gear the monetary policy instrument towards the normal
objectives. Secondly, the monetary authority should consider avoiding the
targeting of any other variables (Vaish, 2005).
In controlling inflation, direct
measures, as well as fiscal and monetary surer may be used. Fiscal and monetary
measures act as complements of anti – inflationary economic policy. Monetary
policy is enforced by using the different monetary instruments aimed at
reducing the supply of money for speculative activities and increasing the cost
of obtaining funds from the banks for stock – pilling and hoarding of essential
goods which are in short supply. Central bank uses a number of measures to
control inflation to include direct, selective and indirect measures. Money
market is a market established by the central bank to facilitate the
mobilization of short – term credit and hence, serve as medium of the bank to
control fluctuation in the prices of stock and achieve a sustainable economic
growth as well (Noko, 2011).