Introduction
Inflation refers to the increase in universal level of prices for goods and services in an economy for given timeline. Through increase in prices for the value of the currency used in the country drops since each currency unit can only afford fewer commodities in comparison to normal prices. Inflation has both positive and negative impact to an economy. Inflation may be influenced by various factors with money supply being the main cause of inflation. The main element of measuring inflation rate is the annual advance of price index in an economy over a given period of time. The United States has record an inflation rate of 1.1% by April 2013.
Causes of inflation
The main cause of inflation is money supply. Based on various economic analyses, excessive increase of the money supply in an economy is a major contribution to extremely high rates of inflation as well as hyperinflation (Coleman, 2007). The money supply I usually influenced by the spending behavior of the government that allows excess money to leak to the economy.
Keynesian who is a renowned macro-economist argued that there was no direct impact on prices for goods and services as a result of changes in supply of money in an economy. He argued that inflation resulted from various economic pressures that express themselves in form of prices.
One of the causes that Keynesian proposed as to be extremely resourceful in the rise of inflation is increased aggregate demand as a result of increased government and private expenditure. He argued that demand inflation acts as an encouragement to economic growth because the excess demand as well as complimentary market conditions leads to increased investment rates. This gives definition to one form of inflation which is well known as demand-pull inflation (Coleman, 2007).
The other cause of inflation according to Keynesian is the drop in aggregate supply. The possible causes for these changes in aggregate supply are increase in prices as well as natural disasters. This form of inflation is well known as cost-push inflation (Coleman, 2007).
The other cause of inflation that Keynesian came up with is the maintenance for high wages for workers in the economy. Employees will always seek compensation for high standards of living following increased prices for goods and services with increased wages. This does not solve the economic problem instead it makes it worse and defines hard living for the members of the society since the level of inflation gets higher. This leads to a form of inflation known as Built-in inflation (Coleman, 2007).
Inflation rates in the United States
(TradingEconomics, 2011).
(TradingEconomics, 2011).
The above chart is a representation of current inflation rates in comparison to the 2011 and 2012 inflation rates.
Rates of inflation are calculated with the use of Consumer Price Index that is gathered from the monthly records of the Bureau of Labor Statistics (BLS). The latest update was on May 2013 while the other update will be expected on June 2013.
This statistics indicate that in the last 12 months, the Price Index for all urban Consumers (CPI-U) rose by 1.1% before any seasonal adjustment. In April, the Index declined by 0.4% according to the statistics that was reported on may 16th (TradingEconomics, 2011).
Viewing the valuation of price index on monthly basis, the March case indicate that some consumer goods such gasoline influenced the inflation rates o much. At this moment, a decline in the gasoline index was the core of the reduction in the seasonal adjustment of all items index. The fuels also decreases as the natural gas and electricity indexes rose, which led to net result of 4.3% reduction in the energy index. Although, the food index had remained unchanged up to March, it rose by 0.2% in April (TradingEconomics, 2011).
Effects to other countries
The United States is the World’s best economy. Therefore, it is a major trade partner to the rest of the world. Therefore, any economic force influential to the US economy is equally influential to most of the countries in the world.
The main effect of inflation is foreign exchange between countries. The United States in the existing state of inflation rate has influenced most countries in terms of foreign exchange. Having the United States being a global economic superpower with inflation rates at 1.1% it has extensive influence to global rates of exchange (TradingEconomics, 2011). In this regard, the currency value of the Dollar has risen over currencies. This is because nations with higher inflation will have to experience depreciation in their currency if at any point they trade with the United States.
However, the depreciation in the currency and lack of competence by the currency interest rates in the country will have to rise. This is an indication that the levels of investment in the country will decline as well as savings making the inflation rates for the country worse. In return this will lead to high rates of unemployment in the country (Corden, 1985). The economic status of the United States renders influence to the entire globe.
Conclusion
Inflation being the general decline in the price levels for goods and services in a country it is an extremely influential element in the society. It is main effects are depreciation in foreign exchange and international trade as well as extensive influence to interest rates. The United States being World’s best economy has recently recorded an inflation rate of 1.1% which is considered moderate. This rate has had influence to the global foreign exchange rates , interest rates, unemployment rates as well as investment rates.
Works Cited
Coleman, William Oliver. The causes, costs and compensations of inflation an investigation of three problems in monetary theory. Cheltenham, UK: Edward Elgar Pub., 2007. Print.
Corden, W. M.. Inflation, exchange rates and the world economy: lectures on international monetary economics. 3rd ed. Oxford: Clarendon, 1985. Print.
TradingEconomics. " Indicators for UNITED STATES." TRADING ECONOMICS | 300.000 INDICATORS FROM 196 COUNTRIES. N.p., 16 May 2013. Web. 13 June 2013. <http://www.tradingeconomics.com/united-states/indicators>.
