Report 'Inflation and the Polarizing Effect On The Economy' by Altal at 16 Apr 2022

Inflation and the Polarizing Effect On The Economy Source

Inflation and the Polarizing Effect On The Economy

Inflation isn’t a new concept. It’s been dated as far back as the 18th century. It has caused great concerns to economists, industry leaders and governments of nations. It’s a major indicator of a nation’s economic stability as it has direct correlation to periods of economic booms and recessions. Handling Inflation is so paramount even in deciding public office candidacy. In this report I would look into the concept of inflation from current economic standpoint, its effect and how to efficiently get it controlled.

Inflation is such a key economic indicator that measures increase in price of goods and services, usually expressed in percentage. A sustained increase in these prices over time can cause a movement from economic growth and expansion to serious depression. Over the last 5 years, inflation was not much of an interest to the average American but with the past two years, this interest has spiked judging from the number of Google [1] searches of “inflation” and now 90% of American’s [2, 3] have become so aware and concerned about inflation. But why the sudden clamor! In May 2021 [4], inflation reports from the U.S. Bureau of Labor Statistics were as high as 5% and continually rose to 7.0% in the months following. For over 40 years the US has maintained an average of 3.4% inflation rate which is 70% above the healthy 2% inflation rate [5]. Contrary to predictions of lower rates in 2022, the monthly inflation rates rose to a new 7.5% high, which is 120% above the 40-year average, and further to 8.5% in the March 2022 inflation report [6].

Why The Continual Hike In Rates

1. Recovery from Corona Virus Pandemic: The lifting of lockdowns introduced the classical demand-pull inflation into the economy. While global market tries to even out the disruption of demand and supply chain following lock-downs sanctions due to the Corona virus pandemic, it sent an increase demand shock for goods and service. As supply was limited, as companies are trying to recoup losses during the lockdown, it sent prices of goods upward.
2. Failed Monetary Policies: While the lock downs were relaxed preemptive policies were not placed to check price surge rather monetarist policies of injecting more cash stimulus [7] into the economy were implemented resulting in the biting inflation rates.
3. Russian-Ukraine War: Following its invasion into Ukraine, Russian faces sanction therefore can’t trade its oil to the rest of the world while Ukraine a major supplier of foods can’t reach its demand. This has caused a resultant 40% increase in fuel prices and upward increase in food prices.

Effects of Inflation
Even though it is not all gloom and doom, when well-managed, inflation accounts for economic growth. The rising rates of inflation can be beneficial for investors and detrimental to consumers. Households and workers makeup a large portion of these consumers who bear the chain of effects of these soaring inflation rates

1. Loss of Buying power: Between 2020 to March 2022, inflation rate rose from 1.4% to 8.5%, a whopping 500% difference with 58% of Americans expressing concern over the diminishing power of the dollar [3]. To accommodate these changes more money is required in exchange for the same quantity of these goods; meaning the purchasing power of the dollar is falling.
2. High Cost of Living. The perpetual increase of price leads has driven high the cost of living causing a straining on households as their incomes and benefits are depleted by the rising rates. Many complain about the decline in household income compared to the 8.5% increase in the cost of living. These has also brought about new revelations about the middle-class and household debts. Middleclass group accounts for 52% of the populace shrinking in size from the effect of the strain thereby causing a widening gap between the rich and the poor. De
3. Debts: the average home in the US battles with debt of $155,622 as of January 2021, following the inflation spikes the debts will continue to increase difficult to pay these debts.

Controlling Inflation
An economy risks collapse when rising inflation rates are not checked. Unfortunately, this is the current state of the American economy. A look into the causatives, the most effective model to curbing this rioting rate will be a monetary policy which advocates lowering aggregate demand by introducing higher interest rates. This will help to mop-up excess cash pumped into the economy as stimuli during the expansion period. To further curb rising rates of goods and service caused by the cut of supply from warring nations, an injection of supplies form national reserves will be go some miles.

Conclusion
In past decades, several models were explored by countries with varying degree of success and failures, with recent happenings it appears the drive to explore new models is clearly absent which is clearly visibly from implemented strategies which have outrightly failed. As much as the current administration stands against implementing contraction policies, it will have to weigh between an economic collapse, losing trust and credibility or regaining the economy and trust of its citizens.

References

1. https://trends.google.com/trends/explore?date=today%205-y&geo=US&q=inflation

2. NY Times-Inflation is a worry for 9 in 10 Americans polled
https://www.nytimes.com/2022/02/25/business/economy/inflation-americans-worry.html

3. Nationwide Retirement Institute®-Inflation Flash Poll Report
https://news.nationwide.com/download/1148077/nfm-21811ao.pdf

4. The Balance: Unemployment Rate by Year Since
https://www.thebalance.com/unemployment-rate-by-year-3305506

5. FRB: What is an acceptable level of inflation?https://www.federalreserve.gov/faqs/5D58E72F066A4DBDA80BBA659C55F774.htm#:~:text=The%20Federal%20Reserve%20has%20not,percent%20or%20a%20bit%20below.

6. United States Inflation Rate - March 2022 Data - 1914-2021 Historical - April Forecast
https://tradingeconomics.com/united-states/inflation-cpi#:~:text=Annual%20inflation%20rate%20in%20the%20US%20accelerated%20to%207.9%25%20in,(40%25%20in%20January)

7. Biden signs $1.9 trillion Covid relief bill, clearing way for stimulus checks, vaccine aid
https://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief-package-thursday-afternoon.html

Link: https://news.nationwide.com/download/1148077/nfm-21811ao.pdf