Many countries all over the world are facing inflation; United States, not being an exception, has continues to experience inflation year after year. This has led to lose of money value coupled with high prices of basic commodities such as food and energy. The word inflation has several meanings; it may refer to continuous rise in the level of prices, or a persistent fall in the value of money. Secondly, it can mean the increase in the quantity of money in an economy, hence, lowering the consumers’ purchasing power. Thirdly, inflation can be regarded as an occurrence, where the amount of purchasing power gradually runs ahead of the production of goods and services resulting to a continuous rise in prices of both commodities, i.e. goods and services, and factors of production. This arises, when the supply of goods and services as well as the supply of other factors of production such as labor and raw materials fail to keep trend with their demand (Greg 153). This type of inflation can, therefore, be described as persistent or creeping inflation.
Finally, inflation can also be hyper-inflation also known as runaway inflation or galloping inflation. This is a situation, where inflation gets out of control, leading to a rapid loss of money value. The money value declines to a tiny fraction of its previous value. To curb this kind of inflation, a new currency has to be adopted. For instance, about some two years ago Zimbabwe had a galloping inflation, which affected its economy negatively (Gali%u0301 124).
America’s inflation leads to substantial increase in the prices of goods. The rate of inflation of a given country can be measured, using the Retail Price Index. A Retail Price Index measures the change in the mean price of a basket of goods and services that signifies the consumption trends of a normal household. This method estimates the change in cost of commodities that a typical consumer buys. It is often prepared for different classes of consumers and for different regions.
According to Gnos and Rochon, inflation may result from various factors, among them being the cost push factors, demand pull factors and the monetary system (34). Cost push inflation occurs, when increased cost of production pushes up the price of commodities. Increase in the cost of production may result from high prices of the raw materials, demand for higher wages by the workers, government imposing high taxes on the product or fall in the exchange rate. Demand pull inflation occurs, when average demand of a given commodity exceeds the rate of production, i.e. the demand for commodities (goods and services) cannot be met by the output, hence, forcing the market prices to go up (Gnos &Rochon 35). Factors that trigger this type of inflation are the general increase in demand for certain goods and services as well as the general shortage of goods and services due disasters such as floods, earthquake r wars. This creates a deficit between supply and demand, hence, the increase in the general level of prices. On the other hand, economists have always argued that inflation is directly caused by the increase in money supply. It can only result from a rapid increase in the quantity of money, supplied to an economy without regarding the output (Gali 197). A government can lead to hyper-inflation in case it finances its spending by borrowing money from the central bank to offset its budget deficits.
Inflation adversely affects the economic activities of a given country both in terms of micro and macro levels. In the United States, rising energy and food prices have driven up the prices of other products as from September last year. Some economists continue giving people hope on the basis that the factors pushing up prices of basic commodities maybe temporary and sooner or later everything will be back to normal. They argue that outside the volatile market of food and energy, the economy is improving at a recommendable rate. During inflation money substantially loses value, hence, resulting to the increase in the cost of capital. This discourages the demand for funds in the economy and limits the investors from investing in the volatile market as they fear losing their capital. Moreover, investors will turn to real estate investment, which appreciates its value over time, hence, shifting investments from speculative activities.
All other things remaining constant, during inflation the amount of disposable incomes, allocated to consumption, is high since prices will be high and real incomes low. In such a case, savings will decline, resulting in inadequate saved funds. This hinders the process of capital creation, and hence, the economic prosperity of the country. Some researchers have argued that mild inflation leads to an expansion in economic growth of a country as it motivates the producers to increase their output, while high rate of inflation may lead to stagnation of production activities. Inflation implies that the country’s commodity prices are higher as compared to world market prices. Such a situation will lead to fall of exports, while import bill expands, causing a deficit in international trade and consequently balance of payment problems.
In times of inflation, the low income earners get more affected, especially where the prices of basic commodities rise persistently. This is associated with loss of purchasing power and increased poverty. Inflation in America has been experienced through the escalation of prices of basic commodities such as food and gas. More money is now spent on food and gas than one would have spent a year ago. According to the U.S. Department of Agriculture, beef and pork prices were projected to increases year by year by about 6-7% as supplies continued to shrink and grain costs went up (Gali 57). There has been an increase in grain prices with corn doubling over a period of one yyear, though the price of wheat has rolled back after hitting its all time high last year. The price of a gallon of gas has rose by over 12% over the last few months with prices differing from state to state. Even with the rising food prices, wages and salaries have continued to be constant, hence, resulting to most low earners being strained by the high prices.
The U.S. government adopts various policies to help deal with inflation. One of them is the fiscal policy, which manages the rate of demand by raising or lowering the level of average demand. Through this policy, the government is able to influence one of the aggregate demand components by either raising taxes or lowering on its expenditure. The government may apply the monetary policy which according to monetarists’ viewpoint is aimed at controlling money supply through setting realizable targets for monetary growth. According to Neo-Keynesians, monetary policy can be used to control the rate of interest so as to discourage people from borrowing from the banks. Through direct intervention, the government can fix wages and prices to facilitate almost equal rise in factors of production and other incomes at the same pace as improvements in productivity of an economy increases. It should be noted that, these policies are only successful for a given period as they might end up making the situation even worse, hence, leading to occasional price rises and wage changes. Similar to direct intervention, both fiscal and monetary policies may also fail if the government relies upon them as the only methods of mitigating inflation. What is required is a combination of policies to help control inflation. One of the goals of the Federal Reserve System is to make sure that there is enough money to allow the economy to grow and not so much to cause inflation (Greg 158). An economy is able to sustain long-term growth if inflation is controlled. One way the Federal Reserve does this is by letting the money supply to be in pace with economic growth but not faster. In case of a high inflation rate, the interest rate of borrowing money from the Federal Reserve is increased, hence, discouraging the banks from borrowing. This helps to control the money held by bank customers as they are unable to borrow much money from the financial institutions due to the increased interest rates charged.
Food and gas prices continue to rise year after year, unless strategic plans are put in place to mitigate inflation, most Americans will be forced to turn to the government food programs as the household budget skyrockets. The government through the relevant institutions should work on a policy to control prices through lowering the inflation rate to make it possible for people to continue living a productive and healthy life. With proper planning in place, the government will be in a position to ensure that price of basic commodities falls within a range that does not strain the low income earners and fall of the economy.
Related Economics essays
- The National Credit Union Administration
- The 2008 Economic Crisis
- Business Cycles
- Global Finance, Local Intelligence
- Developments and Changes in the American Economy
- New Tax Policy in Latin America
- Effect of International Organizations on Nation States? Economic and Social Policy
- The Global Financial Crisis and its Economic Impacts on Greece
- Foreign Exchange Rate and Commercial Banking
- Cost of Living in Hong Kong