Inflation Consumer Economy
Understanding Inflation as a Consumer
Have you ever thought why you paid for something at a cheaper price than when you paid for it the second time? When the government prints more money that is pumped into the economy it makes prices raise for goods and services, which is called inflation. The U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. Understanding what economist has to say about today's inflations can also help consumers understand where the economy is heading in the future; from the goal of trying to control inflation to the plan of how they, the Federal Reserve, plan about doing so. A consumer, needs to know the break-down, is inflation one of the top concerns, will it be controlled, how are you, Federal Reserve, trying to control it and how will it affect the consumers. In the paper you learn about the history of inflation, how the economy tries to control inflation, and how it affects us, the consumers, as a whole.
Throughout history, there have been many ups and downs with the rate of inflation for the US. There was an extremely high rate of inflation around 1920. In the last 60 years, the inflation rate has averaged at around 5% per year. In the last 10 years, the rate has decreased down to only 2% per year. With the rate constantly changing, there is also constant change in unemployment and the money supply. As of Feb. 2002, the unemployment rate was at 5.5% and the CPI was increasing at 0.2%. Both are factors affecting the inflation rate. The only period of
hyper-inflation occurred from 1776 to 1781 when we revolted against King George II. Inflation has a big history, but history also affects the present and future.
Many people wonder how inflation is controlled. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations using monetary policy. High interest rates and slow growth of the money supply are the traditional way through which central banks fight or prevent inflation. Many developed nations set prices extensively, including for basic commodities as gasoline. The usual economic analysis is that which is under price is over consumed, and that distortions that occur will force adjustments in supply. For example, in society, if there is a huge need for bread and the official price of bread is too low, but there is no increase in the amount of bread supplied, there would be too little bread at official prices to meet the needs of society. Therefore, the people that want or need bread would panic. Temporary controls of what may complement a recession as a way to fight inflation.
Over the recent years, inflation has raised some concerns. Is inflation really under control or not? In October 2006, the newly installed president of the Federal Reserve Bank of Philadelphia used his first major address on the U.S. economy to fret over inflation and to warn that the Central Bank may have to raise rates again. The bank's President, Charles Plosser, said “there is some cause for concern on the inflation front. Despite recent hopeful news on the inflation front, the inflation outlook remains uncertain and there is a significant possibility that
inflation rates will remain above those consistent with price stability for some time”. This has implications for monetary policy. He also states that “while the Fed must keep a careful eye on the pace of economic activity and be prepared to adjust its policy in either direction, the predominant risk-and the attendant economic cost- are on the inflation side”.
So with that being said, is inflation the Feds top concern? According to the Feds most recent deliberations, it shows that keeping inflation from seeping deeper into the economy remains the top concern for the Federal Reserve policymakers. In their October 24-25 2006 meeting revealed that their discussion about the economy's health and even as they decided to hold interest rates steady, the Feds member worried more about the risk of inflation than the danger of the economy growth cooling to much. On Wall Street, stocks rallied as the member's reassured investors that the Fed had inflation in hand. Ben Bernanke, who took over as Fed Chairman in February 2007 succeeding Alan Greenspan, favors the notion of an inflation target and believes it would help the central bank communicate more effectively with Wall Street and Main Street. Even with their concerns about inflation risks, Fed policymakers still stuck to their forecast that slowing economic growth and a claming down of once surging energy prices will eventually lessen inflation pressure. The Feds October 2007 meeting have suggested that inflation is settling down. Their goal is to slow the economy sufficiently to thwart inflation but not so much as to cripple economic activity, but according to Dallas Fed President Richard Fisher, who sits on the Fed's rate-setting Open Market Committee (FOMC) stated that U.S. inflation is running close to the Federal Reserve's danger zone. In a speech given by Fisher in
Dallas, Texas, he stated that, after hurricanes Katrina and Rita, price pressures are mounting as energy gets more expensive and business pass on their higher costs to customers. The Fed's preferred measure of core inflation which is a measure of inflation which excludes certain items that face volatile price movements such as food and energy cost, is running at 2.0 percent.
In 2007, U.S. economic growth is expected to strengthen and inflation is seen slowing down, but it is still too soon to say rising prices no longer pose a threat to the economy, the President of the Federal Reserve Bank of Chicago said. Michael Moskow, a voting member of the FOMC in 2007, said risks to inflation remains his predominant concern' and ‘the key going forward is weather that trend of lower inflation can be sustained and how quickly inflation will move back to the range that is commensurate with price stability'. For this reason, Federal Reserve Board Chairman Ben Bernanke and his colleagues on the interest rate setting FOMC need to be ‘vigilant' in monitoring price increases. The Chicago Fed president said he expects growth this year to pick up from the slowdown of 2006, through economists consider being about 3.0 percent per year.
With that being said, is the economy U.S. inflation at ease? The latest official inflation figures in the United States have soothed fears of serious overheating in the economy. The Consumer Price Index (CPI) for August 2007 shows that underlying inflation remains subdued, reducing the likelihood of further rise in interest rates. The Labor Department said higher oil cost had helped push the CPI up an expected 0.3 percent, but the core rate-the rate the markets watch closely-increased only 0.1 percent, compared to a 0.2 percent rise in the pervious
months. The core rate is seen as a more accurate indicator of inflationary pressure in the economy. The August CPI was up 2.3 percent, compared to a 2.1 percent gain in July. The core rate was up 1.9 percent, compared to 2.1 percent in the pervious month. Over the first eight months of 2007, the CPI is running at a 2.6 percent annual rate, up from a 1.6 percent in the first eight months of 1998. The CPI is one of a handful of key data reports that will feature prominently at the next policy meeting of the U.S. central bank, the Federal Reserve, when officials will discuss whether to raise interest rates for a third time this year. Although data showing a surge in consumer spending in recent months have stoked up concern that the economy is overheating, data such as the latest CPI suggest inflation is under control. Jay Feldman, economist at Credit Suisse First Boston stated that it's not a done deal, but we expect the Fed to remain on hold. Certainly, the economy continues to grow robustly but judging by their recent statements, the Fed will take a wait-and-see stance, as long as inflation remains benign.
As a result of inflation, prices of goods and services increase. Ben Bernanke is the Federal Reserve head chairman, whom oversees all of the problems with inflation. Inflation has been a continue problem to the Central Bank. As of today inflation has been at a neutral stand point, but still can rise at any second. A number of ways can control inflation but the more effective ways have been high interest rate and operations using monetary policy. With the monetary policy the government and the central bank manages the supply of money. Consumer Price Index is a measure of inflation that adjusts the effects of inflation. With CPI you can also
see if the FED can see if inflation is under control or not. Inflation not only affects the United States but the whole world by high prices. At the result of inflation, it can lead to unemployment declining because the economic growth is growing and needs more workers. High interest rate can also be a factor for increasing inflation because high interest rate slows the rise money supply down.
If inflation was not a problem in the world things would be smoother so far as not having to worry about inflation. Or for some companies that try to prepare for it; like preparing for the worst. Even though inflation has not come upon us for a few years or so, except for recently in the stocks, it is good to say that we as United States have been doing something right to avoid inflation.
REFERENCES
www.forbes.com
www.news.bcc.com
www.channelnewsasia.com
www.cbsnews.com
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