The recent global economic crisis has many people asking “what is causing inflation in the US?”
With unemployment topping out over 10%, it appears that corporations and individuals are being forced to tighten their belts, cutting back on frivolous expenses, and make cuts to the workforce in an attempt to survive the current economic climate. In order to combat this, central banks all over the world have been tightening their belts, raising interest rates and even taking some measures deal with debt that may no longer be worth it.
So, what exactly is causing inflation in the US?
With the recent global financial crisis, investors all over the world have become less confident in banks, which has been said to be leading to a decline in lending throughout the globe. With this decline in lending, businesses are finding it more difficult to get loans for major purchases, like a new car or home. Even business loans are becoming more difficult to secure, with banks requiring increased collateral and larger down payment amounts in order to get a loan approved.
With all of these factors coming together, it is no wonder that inflation is rising in the US.
Although the reasons behind inflation are complex, they can be boiled down into a few main factors. One is the global economy, which has been affecting the US since the global financial crisis began. With this being the case, it would be safe to assume that the tightening of economic policies worldwide are also perhaps the cause for the rising prices of goods and services. As world trade continues to expand, the price of goods worldwide will continue to rise, eventually making inflation rise in the US.
Ultimately, this type of inflation will trickle down, and although many people may not see it coming, it could most certainly be coming.
Many economic researchers agree that the Federal Reserve should begin raising interest rates to cool the economy. However, most experts agree that interest rates should remain low until the end of the current global economic slowdown. Raising interest rates will cause inflation to rise, so this is something that is best left up to experts to determine. In addition, the tightening of monetary policies by central banks around the world is also contributing to inflation. In fact, it is this tightening of economic policies which is expected to cause inflation to rise further in the US.
The slowing of global economic policies is also expected to cause inflation to increase in the US. One of the main reasons for this is the fact that China has become a major player in the global economy. As more consumers in the US to buy goods and services manufactured in China, the price of these products in the US will gradually increase. This is a positive for the economy, but many economists believe that it is the tightening of economic policies by central banks all over the world, particularly the US, that is the main cause of inflation. Essentially, it is the tightening of credit standards and other lending practices by banks which are causing it to rise.
Another factor that is believed to be behind the rising inflation in the US is the increasing demand for goods and services produced in China. Additionally, these companies are able to purchase large quantities of raw materials at a much lower cost than American companies due to their ability to purchase products in bulk from overseas suppliers.
Something even small online businesses have the ability to do.
Regardless of the exact causes of inflation, the problem is that it affects the overall health of the American economy. When there are high inflation rates in one country, it naturally leads to an increase in the demand for money and its purchase, leading to increased production, and higher salaries for workers in that sector of the economy. However, when the purchasing power of that currency decreases, the overall economy of that country decreases. Because the US has been an exporter of both goods and services, it has been negatively affected when the prices of its export products increase.
How to Fix Inflation Problems in the Economy
How to fix inflation problems in the US is a question asked by many, as the cost of living continues to rise. There is widespread concern that the growing gap between rich and poor will continue to widen, leading to increased levels of unemployment and possible financial collapse. The question then becomes how to fix inflation problems in the US.
The recent increase in the cost of living alone is enough to put anyone off. However, the long term impact of inflation on the economy has not been properly considered. This is because most analysts are unable to properly capture its direct effect on the economy. They focus instead on the short term effects, which they say is the result of the inflationary spiral. They fail to consider that the spiraling cycle is something artificial, arising due to a long term change in the economic conditions.
Cost of Living: Cost of living is not fixed but affected by inflation. This means that the cost of virtually every commodity has risen over the past few years. We know this because basic goods, which are non-tangible in nature, such as food and water, now costs more than ever before. The rising cost of essentials will reduce consumption of luxury items, causing a reduction in economic activity. It will be harder to keep up with debts, which will result in an increase in the national debt burden.
Deflationary Spiral: If inflation is allowed to continue unabated, it can lead to a deflationary spiral, which results in lower output and higher prices for most goods and services. The contraction of economic activity will result in falling investment, higher borrowing costs for businesses, reduction of government spending, and eventually, the tightening of credit (tightening credit requirements to ensure more debt finance) and higher interest rates (causing higher mortgage payments and further lowering the economic activity).
Stimulus Package: Many economic models predict that a fiscal stimulus package (also known as a Fiscal Stimulus Package) can significantly help an economy adjust from the effects of inflation. When the government spends more money than it makes, some companies raise their prices (making products and services cheaper for consumers) to compensate for the lost profits and to generate additional revenue. This leads to a virtuous cycle (a virtuous economic cycle is when prices rise because demand exceeds supply) in which higher prices help companies make more profit and consumers buy more products and services, creating a positive inflation spiral.
Discount Rate Approach: Interest rates are often determined by the psychology of the economic environment and the state of the country’s credit rating. For this reason, central banks have been said to have the option to use a “pass-the-matches” policy (paying interest on an outstanding balance even if no new transactions have occurred) to offset the potential inflationary effects of free money.
Central Banks: The actions of banks can also have a significant impact on the efficiency of how to fix inflation problems in the economy. Central banks have been said to often intervene in the economy by changing the base interest rate or conducting large-scale asset purchases to try to stabilize market fluctuations. These activities are meant to offset the impact of market factors on inflation and thus, the need to increase aggregate demand.
Changes in Consumer Price Index (CPI): The Consumer Price Index (CPI) tracks price changes across many of the major goods and services in the economy. For this reason, when a government or other agency alters the rate of this particular index, it can have a significant impact on how to fix inflation problems in the economy. In particular, if the rate is increased by roughly 10 percent, the cost of most consumer goods and services will increase, which may lead consumers to spend more. Over time, this increased spending can lead to a rise in aggregate demand and rising prices for goods and services.
At the same time, if the rate of increase is cut down by the central bank, the cost of items purchased by the general public will decrease, which will reduce aggregate demand and may stimulate the economy.
Provided by Antonio Westley
Disclaimer: This article is meant to be seen as an overview of this subject and not a reflection of viewpoints or opinions as nothing is definitive. So, make sure to do your research and feel free to use this information at your own discretion.