How to Use Supply Side Policy to Control Inflation

Written by kristyn hammond Google
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How to Use Supply Side Policy to Control Inflation
Supply side economics can help control inflation. (Jupiterimages/ Images)

Supply side policy constitutes any national policy that inspires an increase in the production of goods and services through various markets. It is a macroeconomics policy often represented by the lowering of income taxes, decrease in federal regulations or a decrease in the capital gains tax. The intention is to provide economic impetus for companies to produce more product by reducing the federal regulations that force them to produce less. Under ideal circumstances, supply side policy can help control inflation by driving overall market prices down as a result of the increased production.

Skill level:
Moderately Easy

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  1. 1

    Select industries where you notice above-average inflation occurring or where you expect to see above-average inflation occurring in the future. Speculate on the cause of this inflation. For instance, if you notice the overall price of fuel increasing beyond normal inflation percentages, look for the possible causes of this inflation, such as a decrease in foreign supply, increase in domestic demand or additional fuel demands from new industries.

  2. 2

    Determine if the inflation you notice is a temporary fluctuation or long-term change in the market by analysing the cause of the inflation. Decide if a new market is opening, or growing in popularity, with its own fuel demands, such as when air travel began to grow in popularity. If the change is temporary, determine how long you can expect the inflationary trend to last. As an example, if you notice a foreign fuel provider unable to produce fuel over the next three years, you may decide that the inflation will have a three-year cycle but ultimately be a temporary problem.

  3. 3

    Address temporary fluctuations of inflation through temporary supply side changes by making time-driven changes to the basic market. Design a temporary reduction for income tax and capital gain tax over that market for the years in question and reduce regulatory legislation aimed at controlling production. For instance, if you know that the inflation will be the standard over three years, provide a three-year tax reduction on domestic production combined with a regulatory reduction aimed at encouraging domestic providers to produce more fuel for the next three years.

  4. 4

    Approach long-term inflationary changes with long-term solutions. Alter your long-term regulatory restrictions on domestic production to allow for increased domestic product without a time restriction. Review potential foreign distributors and consider increasing allowances for imports. Provide short-term tax reductions to help reduce your current inflation while your long-term plans take effect. As an example, you realise that with a new industry demanding fuel, you are going to have to increase your long-term fuel availability so you look for a reliable, long-term foreign importer while releasing regulations to produce more fuel domestically.

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