The United States of America Economy Inflation
Inflation refers to the general increase in the prices of goods and services consumed by a typical household in a country. The rate of inflation in any country is measured based on the consumer Price Index and the Producer price indices of various products. The calculations are carried out using a typical basket of items (goods and services), which are rated based on weighted measure which corresponds to their consumption rates within any country. However, not all the goods in the basket may be included in the final calculation. The CPI is compiled by the Bureau of Labor Statistics on a monthly basis. The most common type of CPI is the CPI- U, which focuses on the expenditures of urban dwellers. The BLS collects information about product prices and then uses this to compile the CPI. The second CPI is the Chained CPI-U. The Producer Prices Indices may also be used by the Bureau of Labor Statistics to estimate the inflation rate.
The Producer Prices Indices comprise of a set of indices which are based on the prices that consumers get for their products. The three key types of PPI include industry Based PPI, Commodity Based PPI and Stage Based PPI. Each of these measures inflation from a different perspective. From 1914- 2013, the U.S maintained an average inflation rate of 13.5 percent. However, the rate was not constant but keeps on fluctuating with time. The U.S shows a low rate of inflation in comparison to other countries. From the CIA reports, the U.S recorded the highest inflation rate in 1980 at 13.5 percent. Inflation can be existent in two various ways (1). It can be on the demand side or on the supply side.
The supply side inflation occurs through a cost- push factors. The cost – push inflation comes about due to increase in component costs, increase in salaries or reduction in exchange rates. In each case, the impacts of the inflation are the same. Increased component costs causes increased product costs to cater for the production and distribution process. The increase in salaries on the other hand results in increased product demand which eventually leads to cost increase. The reduction in exchange rates also reduces the value of money, hence resulting in the increase in product costs. The demand side inflation results from uncontrolled increase in demand and aggregate output. This results in the increase in the gap between the available resources and the demand for the products being sold. The factors that result in demand side inflation include depreciation of the local exchange rate and reduction in the indirect and direct government taxation (Bade and Michael 867).
Despite the fact that inflation hurts the consumers, it benefits the business people. This is through increased profits when the factors of production or the products to be sold are purchased before inflation sets in. In addition to this, borrowers who are issued money before inflation also gain due to the lower interest rates charged at a time when others pay high interest rates. Inflation erodes the purchasing power of individuals through reduction in the value of the money. Contractors and savers may also lose during inflation. This is because contractors may have signed contracts based on lower material costs but they have to pay higher costs for the materials due to inflation. The savers on the other hand loose due to the reduction in the interest earned on their savings. In conclusion, inflation as an economic variable affects many areas of the U.S economy.
Bade, Robin, Brian Lyons, and Michael Parkin. Foundations of Macroeconomics. Toronto: Pearson Addison Wesley, 2004. Print.
CIA. “Inflation Rate: Country Comparison to the World.” 2013. Web. 10 Apr 2013. <https://www.cia.gov/library/publications/the-world-factbook/fields/2092.html>.
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