In this paper we attempt to present a critical analysis of the article titled ‘U.S. Consumers Face Quickening Inflation’ . We begin with a brief account of the economic terms used in the article and then we go on to analyze the issue presented in the article.
Economic Terms
Inflation: Inflation is a situation of rising prices when the overall price level in the economy increases. It is a situation characterized by a general rise in the prices of all goods and services.
Deflation: It is just the opposite of Inflation. This is a situation of falling prices.
Consumer Expenditure: The expenditure on consumer goods and services in an economy in a given period of time.
Personal Income: This is the income of the individuals in an economy before the payment of tax. This income does not include the income of the government or retained earnings of the corporate.
Personal Savings: The part of the personal income left after making consumption expenditure is saved. This is personal savings.
Interest Rate: The amount paid on money taken as loan. It is a percentage of the borrowed amount to be paid by the borrower to the lender annually.
Analysis
The US economy was facing deflationary pressure for some time due to the plunge in the crude oil prices in the world market. Even with quantitative easing policy of the government through which the Fed has injected money into the economy, the inflation rate could not be brought back to the targeted 2% level. Since the rate of fall of the oil prices have come down and the prices of housing and medical care are on the rise the deflation is giving way to an inflationary trend . New jobs are created in the economy that has lead to an increase in personal income. The rise in income has pushed up consumer spending. The increased spending has increased the aggregate demand that has put an upward pressure on the price level. The inflationary trend will lead to increased production and hence more jobs will be created. Thus this is the time when the Fed can increase the rate of interest. In this context it should be remembered that with the rise in the rate of interest private investment will tend to fall leading to fall in the aggregate demand. This may adversely affect the growth of the economy.
Another interesting point about these recent changes in the price levels is that despite the increase in consumer spending the saving rate has remained at 5.2% level. This is due to that fact that the increased spending has been accommodated from the income saved from lower expenditure on the fuel prices which tends to be at an all time low level at present. Thus the lower gasoline price has helped the consumers to save more as well as consume more.
The economy is also spending less on imports due to a strong dollar . This has added to the increased income and spending in the domestic economy. But it should also be noted that the higher dollar prices would lead to reduction in exports and that would affect the growth of the economy to some extent.
There is optimism in the US economy as the prices are rising with higher consumer spending. If the fuel prices stabilize then the inflation rate currently at around 1.3% will be expected to reach the targeted level of 2% very soon.
Works Cited
Morath, Eric. "U.S. Consumers Face Quickening Inflation." THe Wall Street Journal 16 February 2016. English. <http://www.wsj.com/articles/u-s-consumer-spending-accelerates-in-january-1456498987>.
