Inflation is the general rate in which the prices of goods and services go up and the purchasing power of a given currency goes down. It is usually expressed as a percentage per year. To explain inflation further, an example is given. If an item costs $2.00 and the annual inflation rate is 4%, then the item will be $2.08 after the inflation. The same money buys less percentage of the good or service than it did before. When the level of inflation is too high, the purchasing power of the currency drops (Cumes 14).
The rate of inflation in a country is brought about by various causes. The causes are as follows. Demand-pull inflation is caused by the rise in demand for goods and services in a country. This causes the prices to go up ending in inflation. The other type of inflation is the cost-push inflation. This is brought about by the cost of production in the companies going up. The prices of the goods are set high by the companies in a bid to maintain their profits. The other cause of inflation is the monetary inflation. This is caused by the excessive supply of money in the economy. This leads to the currency dropping in value. Prices of commodities expressed in terms of the dollar go up.
Inflation in the United States of America dates back in 1872 from the work of Pearson and Warren. The inflation by then was brought about by the increased demand where the economy was expected to provide more than it could supply. This led to the prices shooting to cater for the mechanization and hiring of more workers to take care of the production and satisfy the large market. The inflation could also have been caused by the act of the companies setting their own high prices for the goods. Similar companies were forced to do the same to catch up with their competitors in the market.
Government deficits in the budget also caused inflation. This was due to the urge to raise more money to cater for the deficit. This had an effect on the price of goods. The prices went up, and subsequently, inflation of goods in the economy emerged (“The History of Inflation in America since 1872”). The current annual inflation rate in the United States of America is 2.4% for the year ended in March 2017. Such a rate is beneficial to the country’s economy and is likely to bring more positive outcomes than the negative outcomes. The country has recorded an average level of inflation of 2.5% per year. The level of inflation has increased in the recent years as illustrated below.
The increase has been due to the increased demand for the goods by the local and international markets and the limited supply of the goods. This has caused the prices to go up leading to the increase in the rate of inflation (“Historic Inflation-United States”).
Inflation has both positive and negative implications to the economy of a country. The positive effects are realized when the rate of inflation in a country is maintained at a low percentage. These include an increase in the employment opportunities, and the presence of more money to buy commodities. Low rates of inflation are an indicator that the economy is progressing in the right direction. There is a constant availability of job opportunities in both upcoming and already established companies in a country. There’s also a constant supply of cash in the economy. Purchases are made efficiently and at the right prices. This makes the currency retain its value.
The negative effects of inflation come up when a country has excessive inflation rates. These are rising cost of living, increase in the cost of production, and erosion of the purchasing power. With the rise in the rate of inflation, prices of goods and services go up, and since the flow of the currency is constant, people strain to get the commodities. The rise in the prices of commodities is due to the rise in the cost of raw material and other factors involved in the production. This increases the cost of production of goods. The purchasing power of the currency falls, and the currency loses value, this is due to the high rates of inflation (“What are the effects of Inflation on the Economy?”).
The following solutions have been offered to reduce the rates of inflation: monetary policy, change in taxation levels, and wage control. Monetary policy includes the rising of the interest levels to encourage saving, discourage spending, and discourage borrowing to regulate the inflation. Increasing the levels of taxation on goods and decreasing the government spending reduces the rate of inflation. Rapid increase in the wages of laborers increase the prices of goods leading to inflation. Regulation of the wages reduces inflation (“The Inflation Solution”).
Demand-pull and cost-push inflation has been experienced in the United States of America. Demand-pull inflation is the type of inflation where the increase in the aggregate demand for goods in the sectors of the US economy exceeds the supply by the economy. The companies are forced to look for other employees who will work extra top satisfy the market requirements. The wages increase, leading to an increase in the prices of goods. This increases the level of inflation in the country. The increase in the government purchase can lead to the increase in the aggregate demand and subsequent rise in the rates of inflation.
Cost-push inflation is a type of inflation where there is a reduced supply of goods as a result of the costs involved in the production. Prices have to up due to the high costs of production in the economy. The companies raise the prices of goods in the United States of America to maintain their profit margins. For example, if a certain company in the USA increase the number of workers, the additional workers have to be paid. The company may increase the prices of commodities passing the same implication to the consumer. This is done to ensure that the company remains profitable (Keel 17).
- Cumes, J W. C. Inflation! Elsevier Science, 2014.
- “Historic Inflation-United States.” Inflation – Up to Date Info on Current and Historic Inflation by Country. www.inflation.eu. Accessed May 03, 2017.
- Keel, Laronda. Inflation. Orange Apple, 2012.
- Kennon, Joshua. “What are the effects of Inflation on the Economy?” The Balance, 2016. www.thebalance.com. Accessed May 3, 2017.
- Short, Doug. “The History of Inflation in America since 1872.” Business Insider,
2015. www.businessinsider.com. Accessed May 3, 2017.
- “The Inflation Solution.” The Economist, 2010, www.economist.com. Accessed May 3, 2017.