Import-Price-Push-Inflation

Import-Price-Push-Inflation

This problem occurs mainly for countries that import many raw materials and finished goods from other countries. When the general price level in other countries rise, the price of imports rises and this cost would then be passed by firms onto consumers. Import-price-push-inflation could also happen due to depreciation of the importing country's currency, which makes the imports more expensive in terms of domestic currency.



Solutions

One short-run policy would be to appreciate the domestic currency gradually and modestly so as to make imports relatively cheaper. This will lower the cost of production of exports and shift the SRAS to the right, leading to a reduction in price levels.

An example would be Singapore, which is heavily dependent on imports of raw materials and necessities due to limited natural resources.

Another short-run policy would be to set a price ceiling. In times of impending imported inflation(rapid rises in oil), the government can implement price controls to prevent cost-push inflation from setting in. They can set price ceilings on important essentials such as food and fuel to ensure basic survival of the citizens.

There are limitations to these policies though. For appreciation of Singapore's currency, it may cause exports to be less price competitive due to a stronger $S. As for the price policy, the effectiveness is greatly reduced due to the possibility of black markets arising when shortage of goods occur.

There are also some long-term supply side policies. One possibility would be to look at cheaper alternatives. If there are none present, the country would have to develop its own through research.This may be done using technology to help make manufacturing processes more efficient or develop substitutes for oil. Education is also key in letting the general population know that energy and water resources must be conserved so as to limit demand for such essential resources. This would help curb rise in prices.

These policies are not perfect though as R&D efforts require high capital and labour with no guarantee of success. It may be better to divert the resources used to other aspects of the economy. It is also difficult to come up with any close substitutes for petrol, compounded by the need for a change in mindset and attitude.