Professor Friedman of the Chicago School of Thought also asserted – and he was an extremely persuasive man whose thoughts have dominated the field of Economics for decades now – that ‘inflation is always and everywhere a monetary phenomenon’. By this he meant that SUSTAINED inflation can only be caused by the expansion of money supply by Central Banks – nothing else. Inflation, in his theories, will only happen when money supply grows faster than economic output in an economy. This position by Friedman quickly cemented the understanding of inflation around the world as an economic phenomenon that should be abandoned stricto senso to central banks. Central Banks also stepped up to the plate and took charge of managing inflation – and at times targeting it through strategy – by deploying their key instrument (interest rates). The key understanding is that there is an inverse relationship between inflation and interest rates. If the central bank wishes to slow down inflation, all it needs to do is work on increasing interest rate levels in the country. This is usually done by raising policy rates to which commercial, merchant and investment banks will respond. The inverse is the case if a central bank wishes to spur growth in the economy – interest rates can be reduced so that economic players borrow more and new and expanding businesses can employ more, then the economy grows.
The peculiar behaviour of inflation in Nigeria, By ‘Tope Fasua
