Essay Sample on The Concept of Inflation

David Goodman (2019) talks about the inflation rates in the United Kingdom, arguing that they have been the lowest since 2016. The main argument is that inflation rates reduced considerably because of the prices of clothing and computer games. The lack of pressure from inflation has left officials free to ensure the interest rates are on hold. This article also states that the central bank expects the growth of prices to remain below the target up to 2020. At the same time, there are signs of pressures building in the tight labor market, with the rising ages and weaker pound rates threatening the need for import prices. Goodman's article is vital to understanding the importance of inflation and its effects on the economy.

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Craig Torres (2019) explores the monetary policy in the United States and its impacts on the economy. The main argument is that the current interest rates are appropriate in the US economy, but it flags economic risks from trade disputes and reducing growth rates. According to the Chairman of the Federal Reserve, the interest rates are held after deductions, and this signaled the central bank into resuming cuts whenever the growth potential falls. The author incorporates the views of Jerome Powell, who argues that reducing trade developments and global growth poses significant risks. Persistent low inflation could result in an unwelcome decline in the longer-run of expectations for the public. President Trump is accused of the policies in the central bank and not the widely publicized trade wars between the U.S. and China. These articles focus on the topic of inflation in financial economics.

Article Analysis and Relationship to the Inflation Principle

These articles relate to the inflation principle covered in class. Inflation is the rate at which the prices of chosen products and services in an economy increase over time. Inflation also describes the incessant rise in prices, and it reduces the purchasing power of a country's currency. With rising prices, the currency loses value because it purchases fewer services and goods. The loss of purchasing power affects the costs of living for the public, and this causes reduced growth of the economy. Sustained inflation, therefore, occurs whenever the money supply of a nation is more than the growth of the economy. To handle inflation, the appropriate money authority such as the central bank undertakes the needed measures in keeping inflation without achievable limits and ensuring the smooth running of a country's economy.

Importance, Effect, and Implications of the Current Events

The current events are significant since they support readers to effectively comprehending the causes and implications of inflation. In line with these articles, inflation is categorized into cost-push inflation, built-in inflation, and demand-pull inflation. Cost-push inflation happens when there are increased prices of the inputs used in production. Some of the examples include increased costs of labor for producing a service or good. Built-in inflation occurs whenever there are increased prices of goods and services that forces labor into demanding and more wages for easy living. The demand-pull inflation is when the overall demand for services and goods within an economy increases more rapidly than the production capacity of an economy (Wu, & Xia, 2016). From these articles, it is evident that there is a demand-supply gap from the policies of president trump. At the same time, an increased supply of money in the economy causes inflation. With the availability of more funds to people, positive sentiments among consumers cause higher spending. More spending increases the demand and causes rising prices. The monetary authorities increase the money supply, either through giving away or printing more money to the people or through currency devaluation. In all these scenarios, the money does not retain its purchasing power.

Inflation is both bad and worthy, depending on the side it falls. Some of the affected persons include those with tangible assets such as stocked commodities and property. Citizens holding cash do not like inflation since it reduces the value of the cash. Inflation increases investments, both for individuals in company stock and business projects because they anticipate better results. There is a need for an optimum inflation level for promoting spending to a particular extent, other than saving (Gilchrist, Schoenle, Sim, & Zakrajsek, 2017). Whenever the purchasing power of money is the same throughout the years, there is no difference in spending and saving. It could only reduce spending that severely affects the overall economy. Reduced money circulation slows a country's economic activities. In the United States, the monetary policy of the federal government includes price stability, maximum employment and moderate long-term rates of interest (Auclert, 2019). Each of these monetary policies is aimed at promoting a financially sound environment. Therefore, the Federal Reserve communicates the long-term goals of inflation while also ensuring steady inflation rates, and this promotes stability in prices.

Conclusion

The articles present the concept of inflation, which is central to understanding a country's economic growth potential. As exposed, uncertain or negative inflation value adversely affects an economy. It only causes market uncertainties, hinders businesses from partaking in investment decisions, and causes unemployment while also making people fear increased prices. To this end, there is a need for a balanced approach toward ensuring an optimum value of the inflation rates. The best fight against inflation is investing in stocks. Any increment in costs of labor, raw materials, transport, and other elements of operation because of increased prices of a company's products. There are also special investments that protect against the effects of inflation.

References

Auclert, A. (2019). Monetary policy and the redistribution channel. American Economic Review, 109(6), 2333-67. Retrieved from http://ssl.nbp.pl/badania/seminaria/2vi2017.pdf

Gilchrist, S., Schoenle, R., Sim, J., & Zakrajsek, E. (2017). Inflation dynamics during the financial crisis. American Economic Review, 107(3), 785-823. Retrieved from https://www.nber.org/papers/w22827.pdf

Goodman, D. (2019, September 18). UK Inflation Rate Falls to Lowest Since 2016 on Clothes. Fin24. Retrieved from https://www.fin24.com/Economy/World/uk-inflation-rate-falls-to-lowest-since-2016-on-clothes-20190918

Torres, C. (2019, November 13). US Fed Chairman: 'Monetary Policy is in a Good Place'. Breaking News, World News and Video from Al Jazeera. Retrieved from https://www.aljazeera.com/ajimpact/fed-chairman-monetary-policy-good-place-191113214321641.html

Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the zero lower bounds. Journal of Money, Credit and Banking, 48(2-3), 253-291. Retrieved from https://www.nber.org/papers/w20117.pdf