Inflation is one among the greatest economic worries in the United States today. Surprisingly, even the most learned economists have failed to come to a consensus over the inflation trend of the country. On the 9th day of May 2009, Krugman and Meltzer wrote two articles with conflicting predictions regarding the trend of inflation. In the New York Times articles, Meltzer (2009) predicted that the economy of the United States was to experience an inflationary trend for the coming years. On the contrary, Krugman (2009) argued that the economy of the United States was to expect a deflationary trend over the next few years following the wage cuts and low prices that characterized the economy as at 2009. From the two articles, and from personal research on the internet and other peer reviewed journal articles, it is clear that inflation is more likely in the economy of the United States over the next two years.
According to Krugman (2009) the economy of the United States is characterized by wage cuts and consequent high prices resulting from the fact that low prices imply low production costs. Further, Krugman explains that such measures bring about worse results in the economy. How, one may wonder. When the prices are low, people do not spend much as they anticipate the prices to drop further in future. In the long run, the supply exceeds demand – something that is likely to cause poor productivity in the economy. Poor productivity will, in the long run, lead to an imbalance in the interplay of demand and supply in such a way that supply exceeds demand occasioning high prices. Since the ‘long-run refers to a period of more than one year, it is likely that the next two years will see inflation go up drastically (2009).
According to Gordon (2004) a rise in a rise in the interest rates is among the most detrimental things that can occur in an economy. In explaining this Krugman (2009) refers to the explanation given by John Maynard Keynes more than 70years ago. According to Keynes an anticipation that wages will go down by X% will prompt an X% equivalent rise in interest rates. The net effect will be hyperinflation that is likely to paralyze the economy. According to Krugman the case of Japan between 1997 and 2003 is the most prominent illustration of economic stagnation due to increase in interest rates. Another reason why in my opinion inflation is likely to be on the high is because many stakeholders in the economy are fighting to implement unemployment policies. Considering the explanation behind Phillips Curve, strategies aimed at reducing unemployment will prompt an increase in inflation. The inverse relationship between the two is illustrated below.
Figure 1 Phillips Curve
Source:http://www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories4.htm
According to Meltzer (2009), the strategies employed by Obama and his administration are no different from the strategies employed in the 1970s – a period when inflation hit a double digit. Coupled with the oil crisis of the 70s, heavy purchases of bonds and mortgages with the aim of servicing the heavy deficits of the budget saw inflation rocket high. Meltzer (2009) explains that the current administration is adopting similar strategies. The most prominent example is the bail out plans applied by the Obama administration. The A.I.G and General Motors bail out plans are among the most prominent examples of the strategies similar to the purchasing of bonds and mortgages to service budget deficits.
Gordon (2004) points out that using fiscal policy to create jobs at the expense of debt, as is doing the current administration, is one among the most prominent causes of inflation. Because of the rate at which the government is using fiscal measures to create jobs, the consumer price index (CPI) has increased significantly and the trend is illustrated as follows.
Figure 2 Inflationary Trend
Source: http://www.forecasts.org/inflation.htm
References
Gordon, R. J. (2004). Productivity growth, inflation, and unemployment: The collected essays of Robert J. Gordon. Cambridge [U.A.: Cambridge Univ. Press.
Meltzer, A. (May 3, 2009) Inflation Nation. New York Times. Retrieved May 2009 from: http://www.nytimes.com/2009/05/04/opinion/04meltzer.html
Krugman, P. (May 3, 2009) Falling Wage Syndrome. New York Times. Retrieved May 2009 from: http://www.nytimes.com/2009/05/04/opinion/04krugman.html?_r=1
Surowiecki, J. (2010, Sept. 27). In Praise of Inflation. The New Yorker, Retrieved from http://www.newyorker.com/talk/financial/2010/09/27/100927ta_talk_surowiecki
