CAPITAL MAINTENANCE IN A PERIOD OF INFLATION
CHAPTER ONE
INTRODUCTION
The word inflation is not new phenomenon; it has been experienced by most countries in the world at some stage in their history. Mere looking at this statement ones mind will really, run to developing countries. But it is in history that even the UNITED KINGDOM in 1974 when they could no longer sit back and watch inflation run them set up “The inflation Accounting committee” with Francis Sandilands as chairman to look into the problem. Even the Almighty UNITED STATES OF AMERICA went through it sometime in the sixties before they come to they present economic stability. So, one will not be surprised when countries like ours and some other like the Asian countries and even Latin American Countries are mentioned as suffering from this CANKER WORM called inflation.
There are so many definitions. Solow (1979) for instance, sees inflation as going on when one needs more and more money to buy some representative bundle of goods and services, or a sustained fall in the purchasing power of money. It is a sustained rising trend in the general price level or put in another way, it is a high and persistent rise in the price level. Inflation is a rise in the general level (or average level of prices) of all goods and services. The general price level thus varies inversely with the purchasing power of a unit of money (such as the naira). For example, if prices double, purchasing power decreases by one-half. If prices halve, purchasing power doubles. Therefore, inflation is also a reduction in the purchasing power of a unit of money. The opposite of inflation is deflation.
TYPES OF INFLATION
(a) Demand – pull inflation: This types of inflation take place when aggregate demand is rising while the available supply of goods is becoming increasingly limited. It is induced by excessive demand not matched with increase in supply.
(b) Cots – push inflation: This occurs when prices increase because factor payments to one or more groups of resource owners rise faster than productivity or technical efficiency. Typical forms of cost – push inflationi are “wage-push” “profit-push”, and “commodity”.
(c) Hyper – inflation: Hyper-inflation occurs when the price level rises at a very rapid rate.
CAUSES AND CONTROL OF INFLATION IN NIGERIA CAUSES:
There are several causes of inflation in Nigeria.
1. Excessive money supply caused by ineffective monetary and fiscal policy.
2. Fall in the supply of goods and services, especially agricultural product causing demand to rise and price to rise as well.
3. Budget deficit or government expenditure programmers is a major cause of inflation in developing nations. Too much expenditure by government can cause inflation.
4. Too much importation of goods and services can cause inflation especially in developing nations.
5. An increase in population can put more pressure on the little goods and services thereby prices will rise.
6. The activities of the middleman in the distribution of goods and services can also cause severe inflation in our economy.
7. Excessive demand by consumers and higher production cost can also cause inflationi.
8. Monopolistic practices with respect to production, importation and distribution of certain essential commodities can cause inflation.
9. Increase in wages and salaries and competitive attempts by various economic and social groups to increase their share of the national cake, can also cause inflation.
CONTROL
1. The setting of price control board by the government of fix maximum prices changed for certain commodities is one way of controlling inflation but experience shows that this system does not work.
2. Monetary policy is another way to control inflationi. It involves the use of traditional monetary instruments to reduce the quantity of money in increase in the bank or discount rate, increase in the liquidity ratio, us of open market operation (OMO) special directives etc.
3. Fiscal policy: This entails an increase in personal income tax reduction in government expenditure.
4. Total ban on the importation of certain items may help to control inflation especially when such inflation is imported.
5. The production of more goods and services in an economy may also help to control inflation.
6. The control of wages increases or wage freeze will also help to control inflationi.
7. There is need to overhaul the entire distribution networks to control inflationi in an economy.
INFLATION IN NIGERIA
One of the major causes of inflation in Nigeria has been the various government policies to stimate a fast rate of economic growth and development since independence. In recent years, however, specific policies like SAP: external debt policies, policies on subsidies on petroleum product and fertilizer, policies of privatization and commercialization, policies on trade liberalization, and interest rate deregulation, and others are responsible for the inflationary trend in our economy. Before the SAP, inflation in Nigerian was caused primarily by using world export price and price and falling output. These are major external factor Contributing to Nigeria inflation. Thereafter, domestic or internal causes like increasing government expenditure, rising domestic credit creation and supply bottlenecks such as shortage of raw materials and spare parts worsened the situation. There is need, therefore, for monetary policy reform, exchange rate reform, effective price and wage policy and fiscal policy reform, to solve the problem of inflationi in Nigeria.
But for the purpose of this research, inflation according to Samuelso (1976) is a time of generally rising prices for goods and factors of production, rising prices for bread, cars, haircuts, rising wages, rents etc. Inflation has assumed a great deal of political social and economic significance that goes along with it. The political and social effect a part, the economic impact cannot be over emphasized. One of the most disturbing aspects of this to companies and their managers is its affect on capital maintenance. By companies we mean those publicly owned – those whose capital must have been sources through the money market.
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