Inflation –

CURBING INFLATION
 There is no one cause that's universally agreed upon, but at least
two theories are generally accepted:

Demand-Pull Inflation Cost-Push Inflation

"too much money chasing too • Companies' costs go up
few goods". (costs of imports, taxes, wages,
expenses ..)
• Demand is growing faster than
supply •  they need to increase prices
(usually in growing economies, to maintain profit margins
when the money supply
expands faster than the
economy)
Lạm phát do chi phí đẩy
•  prices will increase

Lạm phát do cầu kéo

 How to solve? Causes
• Income:
Decrease
• Increase income tax
customer
• Have wage control policy demand/
• Spending spending
• Increase bank interest rate (more saving,
Demand >>
less consumer spending/ borrowing) Supply <<
• Tax incentives, < corporate tax Increase
supply
• Increase efficiency

• Increase bank reserve requirement (less $ in

circulation/ for lending) Decrease Too much
money money in
• Call in debts owed to the gov. supply supply
• Increase interest paid on gov. bonds (trái phiếu
chính phủ)
• Decrease government spending & public
investment (đầu tư công)
Government controls spending….
 1. Fiscal policy (chính sách tài khóa/ chsách thu chi của chính
phủ/ chsách ngân sách)

The central government’s efforts to keep the economy

stable by increasing/ decreasing taxes or government
spending. (Ministry of Finance)

 2. Monetary Policy (chính sách tiền tệ)

The management of the money supply and interest
rates. (Central bank)

Main aims:
- Increase supply of products & services
- Decrease the money supply (amount of money in
circulation)
Tapchicongthuong.vn
GETTING THE RIGHT BALANCE
• An economy grows too fast
 high inflation
 rapid devaluation of a currency & its purchasing power.
• An economy has stopped developing (stagnated)
 low inflation or even deflation
• The central bank needs to monitor inflation and adjust
interest rates accordingly to strike a balance.
• Many experts in the western world estimate an acceptable
level of inflation to be at around 2.5%, although there are
many debates and opinions on the matter.
• E.g.:
• The British CPI reveals high inflationary data.
•  The Bank of England may increase interest rates to
discourage borrowing and limit the money supply.

• Note:
• The relationship between inflation and interest rates is not
always straightforward.
• It can take some time for a change in interest rates to have an
impact on inflation.
 Higher base interest rate
 higher rate charged by commercial
banks

 Minimum interest rate decided

 BASE INTEREST according to Base interest rate
RATE
Central Bank Higher cost Homeowners pay
increases of more for
interest rates borrowing mortgages
Central Bank Lower cost of
decreases borrowing
interest rates