Inflation Discussion
Inflation in the economy is typically described as a continual increase in the price level. This increase is usually the result of an increase in the aggregate demand or a decrease in aggregate supply.
The focus of this paper is to analyze the claims of the selected article, relate the separate aspects it describes to the business cycle, and tie in the effects of inflation to issues of purchasing power.
The selected article, which appeared in the Final Edition of the Baltimore Sun, dated August 15, 1997, deals with inflation and its place in the United States’ economy today. Authored by the Associated Press, the article claims that inflation is currently “very tame,” and it cites several government reports to support this claim.
A collection of reports, provided by the government, as well as the analyzed activity of the stock and bond markets, indicate that the economy has continued its trend of moderate expansion. All reports show that there are few signs that the rate of inflation will rise in the upcoming months. The article cites the activity of the inflation-sensitive bond market and the stock market as evidence for the prediction about inflation.
As for the reports themselves, the Consumer Price Index (CPI), the Federal Reserve’s statements, and the Labor Department’s reports also supported the notion that the economy, on the whole is experiencing inflation-free growth.
The Consumer Price Index rose only a modest 0.2% in the month prior to the writing of the article (July). It also noted that the annual rate of price increases was at 1.5% for 1997, compared to the 3.3% of 1996.
The Federal Reserve Report indicated that the increase in industrial production was down 0.1% from July. This suggests that the economy, although strong, was not running away. However, this number was offset by other aspects of the economy, such as increases in the use of electrical energy. It also noted that the country was operating at 83.1% capacity, which is below the 85% that coincides with higher prices.
Finally, the Labor Department reported a twelve thousand case increase in the number of unemployment claims. However, the average number of claims is at its lowest point since the winter of 1989.
Generally, the annual core inflation rate is at 2.4%, which is down form 1996’s 2.6%
Inflation is a problem that affects everyone. It excludes no one in the economy. Therefore, it should be and is one of the most frequently watched topics that are dealt with in the economy.
Inflation has long reaching effects that pervade many aspects of the economy. From the price of bread at the local grocery store to the cost of buying a new car, inflation affects the consumer’s purchasing power. Compared to its value before an increase in the inflation rate, the value of a dollar is less when inflation rises. Therefore, the price level increases, and less goods and services can be purchased for the same amount of money.
Inflation is also the cost of expansion. To understand this, however, one must examine the intricate relationship between the price level, potential capacity, inflation, and employment in the business cycle.
This article states that the country’s economy is experiencing a moderate expansion with tame inflation rates. During a typical expansion, output increases as business try to meet the aggregate demand. With increased output, more employees are needed to handle the demand, and employment increases. However, the price level must also increase, as the rate at which it increases is based on the speed of the expansion. If the aggregate demand requires more than the potential output, an expansionary gap results as the short-run response. This is accompanied by an increase in the price level (inflation). Eventually, however, the economy reverts back, in the long run, to its potential level of output. The temporary benefit of the short-run response is increased profits, but the cost is a dramatic increase in inflation. As for the employees hired in order to handle the increase in output, they are laid off, which results in an increase in unemployment claims. Therefore, unemployment is also related to inflation, as indicated by the article.
All in all, the economy does show a modest expansion, with slight increases in the price level. However, when compared to the yearly averages as a whole, the economy currently is outperforming last year’s numbers. These numbers only differ slightly, but optimistically speaking, they are better than the previous year’s.
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The focus of this paper is to analyze the claims of the selected article, relate the separate aspects it describes to the business cycle, and tie in the effects of inflation to issues of purchasing power.
The selected article, which appeared in the Final Edition of the Baltimore Sun, dated August 15, 1997, deals with inflation and its place in the United States’ economy today. Authored by the Associated Press, the article claims that inflation is currently “very tame,” and it cites several government reports to support this claim.
A collection of reports, provided by the government, as well as the analyzed activity of the stock and bond markets, indicate that the economy has continued its trend of moderate expansion. All reports show that there are few signs that the rate of inflation will rise in the upcoming months. The article cites the activity of the inflation-sensitive bond market and the stock market as evidence for the prediction about inflation.
As for the reports themselves, the Consumer Price Index (CPI), the Federal Reserve’s statements, and the Labor Department’s reports also supported the notion that the economy, on the whole is experiencing inflation-free growth.
The Consumer Price Index rose only a modest 0.2% in the month prior to the writing of the article (July). It also noted that the annual rate of price increases was at 1.5% for 1997, compared to the 3.3% of 1996.
The Federal Reserve Report indicated that the increase in industrial production was down 0.1% from July. This suggests that the economy, although strong, was not running away. However, this number was offset by other aspects of the economy, such as increases in the use of electrical energy. It also noted that the country was operating at 83.1% capacity, which is below the 85% that coincides with higher prices.
Finally, the Labor Department reported a twelve thousand case increase in the number of unemployment claims. However, the average number of claims is at its lowest point since the winter of 1989.
Generally, the annual core inflation rate is at 2.4%, which is down form 1996’s 2.6%
Inflation is a problem that affects everyone. It excludes no one in the economy. Therefore, it should be and is one of the most frequently watched topics that are dealt with in the economy.
Inflation has long reaching effects that pervade many aspects of the economy. From the price of bread at the local grocery store to the cost of buying a new car, inflation affects the consumer’s purchasing power. Compared to its value before an increase in the inflation rate, the value of a dollar is less when inflation rises. Therefore, the price level increases, and less goods and services can be purchased for the same amount of money.
Inflation is also the cost of expansion. To understand this, however, one must examine the intricate relationship between the price level, potential capacity, inflation, and employment in the business cycle.
This article states that the country’s economy is experiencing a moderate expansion with tame inflation rates. During a typical expansion, output increases as business try to meet the aggregate demand. With increased output, more employees are needed to handle the demand, and employment increases. However, the price level must also increase, as the rate at which it increases is based on the speed of the expansion. If the aggregate demand requires more than the potential output, an expansionary gap results as the short-run response. This is accompanied by an increase in the price level (inflation). Eventually, however, the economy reverts back, in the long run, to its potential level of output. The temporary benefit of the short-run response is increased profits, but the cost is a dramatic increase in inflation. As for the employees hired in order to handle the increase in output, they are laid off, which results in an increase in unemployment claims. Therefore, unemployment is also related to inflation, as indicated by the article.
All in all, the economy does show a modest expansion, with slight increases in the price level. However, when compared to the yearly averages as a whole, the economy currently is outperforming last year’s numbers. These numbers only differ slightly, but optimistically speaking, they are better than the previous year’s.
Labels: Academic Papers
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posted by The Voice at 12:09 AM
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