By: Hailey Kiser
As of right now the current inflation rate is 1.9%. Which is the lowest it has been in 16 months. However, how much higher will it get in the future? After listening to HL Quist’s podcast, I found that we are still in the recovery stages of the economic cycle, since the last recession of 2010. So now is the time to capitalize off the “inflationary boom, before the next crash” (Quist). Now you may think that we will never have another recession, but it is inevitable that it will happen in the future. What we can do to figure out when to expect high inflation rates, is to look at forecasts and consumer prices. The chart to the right shows the forecasted inflation rates. As you can see they show an increasing rate. When we look at consumer prices we have to think about consumer spending power. Personally, I feel that consumers can’t buy as much for their money. After looking at reporter, Maria Lamagnas’ post, she states that “consumer price index increased by 2.8%.” Although, small, predictable increases in CPI is actually a good thing. When the inflation is predictable, it is easy for businesses to adjust accordingly. Furthermore, consumers are able to anticipate future prices. Thus helping them purchase goods when prices are low and boost the economy, because of the increased consumer spending.
Although we are not going to hit a recession in the near future, we still should understand how to deflate the economy. So how do we? The overall goal of deflation is to decrease the rate at which prices are increasing. What we will see the government do, is increase interest rates. When banks increase their rates “fewer people want to borrow money because it costs more to do so while that money accrues at a higher interest” (Kramer). We will also see the contractionary monetary policy enforced. This is when the government decreases bond prices, because the fixed interest and principal payments stated in the bond will become less attractive to investors. Thus, having less people want to purchase bonds. The third method is to simply reduce the money supply. This is done when the government enacts policies that encourage the reduction of money spent. When the government enacts policies it makes sure that the money spent within the economy goes straight to their pocket because they then can control when, where and how it is spent.
Now, the trend predictions for the future could all be myths or truths. But you never know what to expect until you’re in the mists of it. Finally, knowing when and how to predict the future inflation rates and how to deflate the economy, will help tremendously in years to come.
Works Cited
Amadeo, Kimberly. “How Bad Is Inflation? Past, Present, Future.” The Balance Small Business, The Balance, www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093.LaMagna, Maria. “Inflation Is Rising Fast - Here's What You Should Know about Consumer Prices.” MarketWatch, MarketWatch, 12 June 2018, www.marketwatch.com/story/buckle-up-theres-a-lot-more-to-inflation-than-the-price-of-goods-2018-02-21.
Quist, H. L. “H L Quist - The Myth Buster Podcast.” Camanda Sermons, RNIB's Insight Radio, player.fm/series/h-l-quist-the-myth-buster-2394505.
In many economists opinions, the next recession could be tomorrow. Congress repealed the part of the 2009 recovery act that put the Glass Steagall Act if 1933 back into effect, which prevents banks from taking on securities, like playing with your mortgages. Additionally, the market is somewhat affected by institutional trust and decay, and as of late that has been under stress due to political graft in the administration. Inflation in itself is a dirty word for the older generation of americans due to the economic pattern of the 70's when OPEC cut the IV drip on oil, with negative consequences where the market said it was growing, but we didn't have the resources to match, but it really is just growth in the market, but we just have to have the resources necessary to reflect the growth. Also Nixon took us off the gold standard after Charles de Gaulle tried to cash in, which undoubtedly caused some of the inflation.
ReplyDeleteI agree with this is wholeheartedly. The US, while experiencing explosive growth, teeters precariously on a peak of economic success, ready to fall into recession with these reckless actions taken by the government. The general instability caused by the actions you mentioned, while they may have looked attractive in the short term when they were taken, have certainly continued to cause issues in the lack of security they've yielded, as evident over the past 5 decades now.
DeleteInflation is caused by the demands for goods and services being greater than society's capabilities to produce or by either wage rates drastically rising or costs of production increasing. If we were ever to go through a recession and face major unemployment rates, a period of inflation would be sure to follow. With less people in the work force, less would be produced, meaning demand would be greater than overall supply. Also, today technology in production is greater than it has ever been, but it is consequently more costly as well. And in terms of wage rate, those just joining the work force often complain of a low minimum wage and wanting to earn more. These factors, if not off-set by higher profit and job performance, could lead our country down the path of inflation. I agree, that though it may not happen immediately, it should be something the government continues to keep tabs on just in case.
ReplyDeleteGoods and services is what causes Inflation. If we were to ever go to a recession for unemployment we would have inflation. With having less people in the work force we are going to have less produced and then there would be a greater demand for items. The factors of having lower minimum wages it would off set by having a higher profit witch could lead the country down the path of inflation. This many not happen right away but over time things can change and it could happen so the government should just look out for this.
ReplyDeleteI agree that is good to have a low inflation rate. But we don't want the economy to deflate. Deflation is just as horrible as inflation in many ways. Countries like Greece and Spain expierence deflation of their currency. So what happens is consumers will not spend their money because they know that the prices will keep going down. So they are in no hurry to buy things because they know that it will get cheaper if they wait. This negatively effects consumer spending and ultimately the economy. I do agree however that they should lower the inflation rate as low as they can but not below 0.
ReplyDeleteInflation has a large impact on the economy, especially as you said in terms of purchasing power of consumers. Though inflation is not expected to increase greatly in the coming years it will still have an effect on consumer spending trends. Therefore, it is incredibly important that the government focuses on deflation, even when the rate is not predicted to spike. It's interesting that increasing interest rates will act as a deflator; but fixed rates are important to consider, especially because unexpected inflation/deflation will create winners and loser between the borrower and lender. Finally, I wonder the effect of too much deflation; what rate is optimal for decreasing the inflation rate? Would a rampant deflation be better than a high inflation?
ReplyDeleteI think that the inflation we have right now could be a little higher. The goal is to have a rate of 2-4%, and it is a little low right now. We do not want to be in a position where the rate is significantly dropping and we cannot fix it. Though, it is good that we do not have a rate that changes dramatically very fast.
ReplyDeleteIt is interesting that you address the topic of how inflation affects a recession, as the graph we analyzed in class showed a recession occurring about every 10 years, meaning that it could potentially come out of the blue and hit tomorrow for all we know. When trying to repair the damages of a recession with deflation, it is a tricky situation, as you want to ensure there is not too much deflation. This would increase the real value of debt, and lead to periods of unemployment. Therefore, as you mentioned it is important to try to predict potential inflations and deflations so the economy can be prepared, even as difficult as that may be, that way the economy can have a better grasp on what the next steps should be to restore its original state.
ReplyDeleteIt's interesting that we are stuck on this up and down roller coaster of fluctuating inflation (like GDP) that is almost impossible to derail. I agree that is necessary to have a low inflation rate and we want to increase the purchasing power of the consumer, because, ultimately, the consumers are who drive our successful economy. However, if we deflate so much, to the point where people are choosing to hold their money and pocket it so they can wait for prices to become even lower, then our main source of demand will be gone. While producers will still be supplying, consumers will no longer be demanding, and there will be a surplus of that good - which is never good. However, again, I agree with you in that it is important to lower the inflation rate because the wages are staying the same and do not generally change along with the rate of inflation. This is why there are winners and losers. For example, someone who takes out a loan on their house would be considered a winner as there is an increase in inflation because, while their house is appreciating, they only have to pay what it was worth when they first got it and it was cheaper.
ReplyDeleteI think that inflation, CPI and prices are all correlated and are following a cycle. The cycle is predictable, but the extend of that the cycle is going to hit is not. That's why recessions, inflations and deflations can be surprising, even if the business cycle is easy to predict. I think that the inflation rate is okay right now and should gradually increase over the next couple of years.
ReplyDeleteYou bring up a lot of good points in terms of inflation and the coming recession and I like how you added that even though we have a very healthy rate of inflation currently, the average consumer may not be feeling or appreciating it fully but that is not to say that is should go lower to appease the average consumer, since it is not the prices but the wages that consumers unhappy with the level of pricing. For if the inflation rate was to decrease any more, the value of the dollar itself would decrease and even if wages increased it would just be accounting for the decrease in value and consumers would not actually be receiving any more money. It is good to take things into perspective though because if consumers do not see the current price level as being in good shape, even though it is, then this means that other factors need to be altered other than the actual prices themselves. Same goes for the unemployment rate. Sure it is at a very healthy level right now, but any average person would argue that it doesn't seem that way. It is not directly the unemployment rate, or the direct creation of new jobs that needs to change, but other factors that stimulate job growth and the growth of the labor force.
ReplyDeleteYour point about the 1.9 interest rate is really interesting because the target interest rate is 2% so the US must be doing very well. This goes along with what you said about the interest rates because the Fed released a statement that they would manipulate the market to keep the inflation rate at that 2% to help the recovery, and they do that with the overnight lending rate which anchors most interest rates. Overall the US is in a good place right now but still needs to finish recovering from the last recession.
ReplyDeleteI can see the correlation between inflation rates and recessions. However, inflation rate's are a product of a recession. So when the actual recession hits then inflation will rise this can be contributed to the abundance of cynically unemployed individuals causing a overall lack of economic productivity because company's assets are being drastically limited. Company's need workers but they can't pay for them so their only choice is to occur a loss, mass lay-offs or try to raise prices in order to account for inflation, sometimes they do all of them. However, the U.S is well equipped to deal with recessions because economist identified the factors that can cause them. These factors include too much money being pumped in the economy through banks. If banks aren't kept in check and make unwarranted decisions. When a large increase in imports is seen and a decrease in exports can also be a indicator that U.S companies aren't preforming well. But the most alarming cause can be stimulated by a ripple effect meaning a result of a already bad economical event. For example the housing crisis caused a recession which made it even harder for households that were heavily affected by the crisis to recover. But I do feel that most government policies aren't as money grabbing as they might be perceived. Most policies are made to redistribute money to areas that can help reverse the effects of the recession by instigating economic growth. Sometimes they aren't as effective but that's all the government can do is hope that their plan works.
ReplyDeleteI agree with much of what was said. Although an inflation rate of around 1% per year isn't viewed as a problem, I think there's a part people are missing. If the inflation rate is 1% per year (very good by the way) for 20 years, over the course of those twenty years price levels have gone up 20%. When looking at inflation in this way, it is easy to see how the cost of things like a loaf of bread in the early 1900s could be $0.05. I agree that the current monetary policy of the Fed raising interest rates slowly is being made to stabilize the market in the economy. Due to the rapid economic growth since 2016, there has been market instability as a result and people are cashing in and out of the stock market because they anticipate longer term growth. In large doses, Deflation is a bad thing but in small doses I think it is a good thing. Like every upward climb, there is a peak and then a fall. Reckless spending and buying things you can't afford is a problem and an upward climb economically gives people a sense of confidence.
ReplyDeleteI agree with everything that was said, inflation is never really viewed as an issue in the United States. Noah does bring up a good point in his blog comment, that over the past 20 years that prices go up 20%. However if you were to compare the United States to a country like Zimbabwe where their prices double overnight. Also, we are no where near close to the point that Zimbabwe was at their currency system was so bad and so messed up that they had to completely reset. I'd say even though we increase 1% every year, the United States has no problem when it comes to inflation.
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