Economics article commentary: June Harvest to Reduce inflation Essay
Economics article commentary: June Harvest to Reduce inflation
Inflation refers to a persistent rise in the general price level in a given period of time usually one year. There are two main types of inflation namely, demand pull inflation and cost push. Demand pull inflation is caused by raising aggregate demand that pulls up prices in the economy. There are several factors that cause this type of inflation, for example, when government reduces income tax leaving consumers with more disposable incomes to spend. However, as far as this article is concerned it is basically cost push inflation that is of major concern. Cost push inflation is caused by rising costs of production that forces producers to increase prices of the final products.
High food prices have been the main driver of inflation due to the drought that hit the country early last year. Agriculture depends on natural factors beyond human control such as weather. A drought will cause shortages that will result in escalating prices as shown in the diagram below.
DD and S1S1 are the original demand and supply curve respectively. A drought will cause a shortage that will make the supply curve to shift to the left, that is, to S2S2 and price to rise from P1 to P2 as quantity decreases from Q1 to Q2.
When the drought affects most parts of the country then aggregate supply of food will fall. This inevitably makes food prices to rise. Furthermore, the article says that the rise in inflation has also been due to increase in international crude oil prices that have resulted into increases in the pump prices of fuel. Fuel is a major component in the production process and so any increase in its price will increase production costs. Consequently, there would be a fall in short-run aggregate supply as shown in the diagram below.
AD and SRAS1 are the aggregate demand and short-run aggregate supply curves respectively. A rise in cost of production shift the SRAS curve to the left that is, to SRAS2 average price increases from P1 to P2.
Although inflation benefits sellers in terms of increased revenue, on the whole, it has several adverse effects. Some of these include reducing the living standard of especially fixed income earners, such as pensioners and salaried workers. This is especially since the article mentions that ‘the cost of living has been on an upward trend following increases in inflation that reached to 14.1%’. So anything that can help to reduce inflation is a welcome move. The title of this article “June Harvest to reduce inflation…” shows that relief is on the way. Reducing Inflation means that prices will fall making essential commodities affordable by the vast majority of the consumers. However, before the harvest brings the relief the government has a number of policies at its disposal that it may use to combat inflation.
Government could use monetary and fiscal policies. For instance in the case of fiscal policies the government could increase income tax to reduce disposable income of consumers. This helps to reduce aggregate demand and so stabilizes prices. The problem with this policy is that it makes the government unpopular among the voters electorate. Furthermore, it may serve to worsen the unemployment problem and might also through down the economic growth in the long run. Government could also use the supply side policies. These are policies that are used by government to increase the supply potential of the economy. For example, the government could abolish minimum wage laws. This would make it cheap to employ workers but would also reduce total cost of production. Its disadvantage is that workers are bound to be exploited by their employers.
In conclusion, government of Uganda should put in place a mechanism to prevent future shortage of food by operating buffer stock schemes. And although such schemes have problem, such as cost of shortage, but their existence helps to ease shortages of foodstuffs caused by unpredictable climate changes. After all, ‘prevention is better than cure’. This is important also because the government of Uganda has no control over the international crude oil prices.