Inflation in the United States
Inflation can be defined as that general rate where the pricing levels for both commodities and services rises consequently causing the country’s purchasing power to fall drastically. It is at this point that the duty of central banks comes in as they try limiting the occurrence of inflation for purposes of keeping the economy going smoothly. In fact, this phenomenon can be traced as early as the coming to an end of the Second World War, which essentially marked the commencement of a golden age for the American economy. Basically, the time was marked by a surging productivity, as well as, economic activity, a continually growing middle-class and the cropping up of the baby-boomer generation. ("U.S. Economic Outlook", 2016)
However, after this extended period of growth in America, the economy started showing the signs and possibilities of slowing coupled by the occurrence of various adverse events. Such encompassed the oil crises of 1973, increases in the global competitive levels, precipitated significant economic alterations together with the collapsing of the Bretton Woods System. As a result, the period was marked by constant stagnating growth, as well as, inflation. Notably, this period culminated to a steep decline in the income levels, massive increases in unemployment and a consequent reduction of consumer demand because of the lack of purchasing power leading to massive challenges being experienced in the economy.
The situation has; however, overtime been brought under control as the current American inflation stands at 1%. (McMahon, 2016) This rate is fundamental in determining an economy’s health. In spite of the low levels of inflation in the US, it should be realized that even the prevalence of moderate inflation has the propensity of eroding the purchasing power of the populace. This has culminated in the establishment of numerous policies in an attempt to avert the occurrence of a possible inflation as was witnessed in the preceding. It is on these premises that the preceding article will discuss the types of inflation, how to manage it and its effect on the economy.
Types of inflation
Two types of inflation on both extreme ends exists i.e. the hyper and the regular inflation. Amadeo (2016) mentions that hyperinflation is a where the commodity prices skyrocket tremendously which in most cases is more than fifty percent in a short period such as a month. It is phenomenal that typically commences when nation's government commences the printing of money for purposes of paying its fiscal spending. The increasing money supply in any one economy would culminate to massive increases in prices of both commodities and services. However, instead of the ruling authority tightening the increasing money supplies for lowering inflation, the government keeps encouraging the scenario by printing more notes to pay for the spending.
Once the population realizes what the government is undertaking, inflation would, as a result, be expected to creep in the economy. This makes the consumers increase their purchases of goods and even services to avoid the payment of higher prices in the future. An acceleration of this situation artificially increases the demand for commodities making it go out of control spiraling into inflation and consequently hyperinflation. Basically, the only gainers in times of hyperinflation are the individuals and entities that took out credit facilities or loans. This is basically because the prevailing high prices in the economy makes the debts they harbor become worthless until it is eventually wiped out.
Regular inflation, on the other hand, is that level of inflation that the central strives to maintain the inflation rates in the economy. This basically means that a small level of inflation is significant and proper for the economy since economists hold to the fact that zero inflation or rather deflation would also be dangerous to the economy just as is the case with inflation. Notably, regular inflation is usually targeted at around two to six percent which is basically a low inflation rate going by the prevailing figures in other states.
Effects of inflation
Inflation exudes its effect on both the nation and its economy, the existing social conditions and even the moral, as well as, the political lives of a country’s inhabitants. On the first instance, the inflation of prices immensely affects the Time Value of Money that basically acts as a primary component for the determination of interest rates in an economy. The real or even the estimated alterations in the inflationary rates culminate to the rising interest rates. Also, if the interest rates pegged on saving accounts fall below the inflation rate, then individuals who rely on such interest rates on savings accounts will essentially become poorer. ("Effects of Inflation | Economy Watch", 2016)
Chand (2014) mentions that inflation takes an enormous toll in the borrowing costs in any country. This is basically because high inflation would lead to more costs of borrowing for individuals and also businesses who are in need of loans, mortgages and other credit facilities. The high costs arise because the financial markets do protect themselves from the increasing prices and borrowing costs both on the short and the long-term basis. Massive pressure is also experienced from the government as it seeks to improve the value of state pension funds, unemployment benefits, as well as, other welfare payments since living costs have massively arisen.
Inflation also affects the level of a business competitiveness. Generally speaking, when a country is experiencing higher inflationary rates in comparison to its trading partners over a period, its exports will be cheaply priced in the global markets. Ultimately, this may start showing through a reduction in the export orders, low profits, few jobs, as well as, the worsening of the nation’s balance of trade. Therefore, a fall in the exports has the propensity of triggering the negative multiplier and at the same time accelerating the effects being experienced on employment, as well as, national incomes. Lastly, inflation causes massive business uncertainty. This is because the businesses would not be sure of the likely costs and prices to be incurred in future. It may, as a result, culminate to lower capital investments and spending.
Managing inflation
Managing inflation is very crucial not only for the United States but also for other countries. The fundamental methods that have often been used in controlling inflation encompass setting up the fiscal and the monetary policies as discussed below:
The monetary policies as applied by the government can be used in making borrowing expensive while at the same time making savings attractive otherwise referred to as the contractionary policy. Essentially, this assists in reducing the supply of money in the economy through the increase of interest rates while the bond prices are reduced. This will reduce the spending in a country which is otherwise significant in times of inflation since it assists in halting economic growths. This aspect of managing inflation is conducted through three methods that include increasing the interest rates and the reserve requirements and lastly enacting regulations which would curtail the supply of money. (Pettinger, 2010)
The application of the fiscal policies can also be applied to sufficiently manage inflation. This can be attained by increasing the taxes in an economy while at the same time cutting government expenditures. This will help by improving the position of the budget while reducing the economy’s demand. In conclusion, therefore, the above article has presented a discussion on inflation and the associating issues.
REFERENCES
Amadeo, K. (2016). 13 Types of Inflation. About.com Money. Retrieved 19 June 2016, from http://useconomy.about.com/od/inflationfaq/tp/Types-of-Inflation.htm
Chand, S. (2014). 9 Major Effects of Inflation – Explained! YourArticleLibrary.com: The Next Generation Library. Retrieved 19 June 2016, from http://www.yourarticlelibrary.com/macro-economics/inflation-macro-economics/9-major-effects-of-inflation-explained/31091/
Effects of Inflation | Economy Watch. (2016). Economywatch.com. Retrieved 19 June 2016, from http://www.economywatch.com/inflation/effects.html
McMahon, T. (2016). What is the Current U.S. Inflation Rate? Inflationdata.com. Retrieved 19 June 2016, from http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp
U.S. Economic Outlook. (2016). Focus Economics. Retrieved 19 June 2016, from http://www.focus-economics.com/countries/united-states
Pettinger, T. (2010). Methods to Control Inflation | Economics Help. Economicshelp.org. Retrieved 19 June 2016, from http://www.economicshelp.org/blog/2269/economics/ways-to-reduce-inflation/
