Postings and assignments for students in Econ 3334 at UH
Wednesday, January 16, 2008
Rising Inflation
We'll be talking in more detail about the kind of numbers quoted here. The article is pretty clear on the trade-off that the Fed faces in its decisions. Higher inflation vs higher growth of GDP.
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Anonymous
said...
This article talks about how the inflation rate grew rapidly last year and how the Fed is trying to ward a recession. The article talks about the core inflation rate which excludes food and energy prices, said Krishna Guha and Daniel Pimlott from the article. In December it rose 0.24 per cent.
Inflation is a sustained increase in the general level of prices in the economy. The importance of sustained prices is that they influence people's expectations about future prices. High rates of inflation will change economic behavior and also affect foreign trade.
In the last months of 2007 there was less than expected spending for the holidays, which also included auto sales. Residential and commercial real estate were also affected by this inflation. The economic activity during these key months could have hurt the U.S. somewhat. Sam Bullard, an economist at Wachovia, said, "The level of inflation will definately be of concern to the Fed, that said, it doesn't preclude it from happening.
According to the text, many people beleive that inflation makes them poorer. This is a common fallacy. The purchasing power of labor, the real wage, depends on the marginal productivity of labor, not on how much money the government chooses to print. If the government reduced inflation by slowing the rate of money growth, workers would not see their real wage increasing more rapidly. Instead, when inflation slowed, firms would increase the prices of their products less each year and, as a result, would give their workers smaller raises.
When it comes to the Fed, if they raise the interest rate, the real GDP growth and the inflation rate slow. The reverse happens when the Fed lowers the interest rate.
I found the article to be helpful in understanding inflation a little more. I did not realize that inflation had really gone up any during the holiday season. I guess I just spent too much as it was anyway.
The Financial Times article discusses the rapid increase in inflation that occurred during 2007 regarding both its cause and possible actions that the Fed may take to counteract it and in doing so, prevent a recession. The article also begins by stating that the core inflation rate, which excludes food and energy prices, rose 0.24 per cent during the past month.
The term ‘Inflation’ refers to an aggregate increase in the price level of a given economy--things cost more than they did before. It is desirable to combat inflation because high rates of inflation diminish the purchasing power of individuals, negatively impact people’s expectations of the future, and, thusly, can lead to a recession.
During the final quarter of 2007, there was lower than expected consumption, which usually spikes dramatically during the holiday season; this was especially notable in the auto industry. Additionally, “residential real estate was seen as “quite weak in all districts” while there were some signs of “softening demand” in commercial real estate.”
One of the general fears regarding inflation is that the consumer is able to buy less with a single dollar making the consumer feel less well off. This fear is grounded in the notion that wages will not rise to maintain a steady purchasing power for the consumer in line with the productivity of laborers. This fear is not illegitimate in the fact that, even though wages will increase in the long run to compensate, there is a period after the inflation has occurred before the wage increase where the consumer is indeed less well off. Unless of course their liabilities are greater than their assets, in which case the inflation devalues the amount of money they own, making them better off.
In order to combat inflation, the best course of action the Fed could take would be to raise interest rates. This would cause a shift to left for the LM curve, combating inflation while decreasing GDP and increasing unemployment. These negatives to fighting inflation makes it unlikely that the Fed will take any action just yet while the economy is in fear of recession in the interim.
While I found this article informative, I did not find it particularly helpful in understanding the concepts it discussed as it did not introduce any new learning and I was familiar with the concepts before hand.
The article “US Annual Inflation Fastest Since 1990” explains the nations slowing rate of growth coupled with inflation. Normally inflation is seen in an economy that is experiencing high growth rates, but in the US inflationary pressures are being felt on the brink of a recession. The main point of the article is that the Fed plans on trying to expand output to speed growth back to where it was previous to its decline, but this could cause even more inflationary pressure in the US economy. In order to expand output, the Fed must expand the money supply. They will do this by a number of ways such as buying bonds and foreign currency, lowering banks’ reserve ratios, and lowering the rate at which banks can borrow money from them. The introduction of more money into the economy will cause inflation to rise. This is not stopping the Fed from taking action. The author of the article states, “The Fed is gambling that inflation expectations will not take off in an environment where business and consumers think the US is close to recession.” Hopefully the Fed doesn’t cause more harm to the economy by trying to help it. Stagflation is another problem addressed in this article. Stagflation is inflation met with a decrease in output. The question is should the Fed try to address the problem of sluggish growth at the expense of inflation, or should the market be left alone to possibly correct itself? The answer to this question depends on if we are willing to deal with a poorer than normal economy while we wait around for the market to get back into shape. Things could possibly get worse before they get better. The economy could stay sluggish for years before it rebounds. Another thought on this is that maybe the market is already trying to correct itself. Perhaps since the US has been growing at such a significant rate a recession is needed to ward away inflationary pressures.
3 comments:
This article talks about how the inflation rate grew rapidly last year and how the Fed is trying to ward a recession. The article talks about the core inflation rate which excludes food and energy prices, said Krishna Guha and Daniel Pimlott from the article. In December it rose 0.24 per cent.
Inflation is a sustained increase in the general level of prices in the economy. The importance of sustained prices is that they influence people's expectations about future prices. High rates of inflation will change economic behavior and also affect foreign trade.
In the last months of 2007 there was less than expected spending for the holidays, which also included auto sales. Residential and commercial real estate were also affected by this inflation. The economic activity during these key months could have hurt the U.S. somewhat. Sam Bullard, an economist at Wachovia, said, "The level of inflation will definately be of concern to the Fed, that said, it doesn't preclude it from happening.
According to the text, many people beleive that inflation makes them poorer. This is a common fallacy. The purchasing power of labor, the real wage, depends on the marginal productivity of labor, not on how much money the government chooses to print. If the government reduced inflation by slowing the rate of money growth, workers would not see their real wage increasing more rapidly. Instead, when inflation slowed, firms would increase the prices of their products less each year and, as a result, would give their workers smaller raises.
When it comes to the Fed, if they raise the interest rate, the real GDP growth and the inflation rate slow. The reverse happens when the Fed lowers the interest rate.
I found the article to be helpful in understanding inflation a little more. I did not realize that inflation had really gone up any during the holiday season. I guess I just spent too much as it was anyway.
The Financial Times article discusses the rapid increase in inflation that occurred during 2007 regarding both its cause and possible actions that the Fed may take to counteract it and in doing so, prevent a recession. The article also begins by stating that the core inflation rate, which excludes food and energy prices, rose 0.24 per cent during the past month.
The term ‘Inflation’ refers to an aggregate increase in the price level of a given economy--things cost more than they did before. It is desirable to combat inflation because high rates of inflation diminish the purchasing power of individuals, negatively impact people’s expectations of the future, and, thusly, can lead to a recession.
During the final quarter of 2007, there was lower than expected consumption, which usually spikes dramatically during the holiday season; this was especially notable in the auto industry. Additionally,
“residential real estate was seen as “quite weak in all districts” while there were some signs of “softening demand” in commercial real estate.”
One of the general fears regarding inflation is that the consumer is able to buy less with a single dollar making the consumer feel less well off. This fear is grounded in the notion that wages will not rise to maintain a steady purchasing power for the consumer in line with the productivity of laborers. This fear is not illegitimate in the fact that, even though wages will increase in the long run to compensate, there is a period after the inflation has occurred before the wage increase where the consumer is indeed less well off. Unless of course their liabilities are greater than their assets, in which case the inflation devalues the amount of money they own, making them better off.
In order to combat inflation, the best course of action the Fed could take would be to raise interest rates. This would cause a shift to left for the LM curve, combating inflation while decreasing GDP and increasing unemployment. These negatives to fighting inflation makes it unlikely that the Fed will take any action just yet while the economy is in fear of recession in the interim.
While I found this article informative, I did not find it particularly helpful in understanding the concepts it discussed as it did not introduce any new learning and I was familiar with the concepts before hand.
The article “US Annual Inflation Fastest Since 1990” explains the nations slowing rate of growth coupled with inflation. Normally inflation is seen in an economy that is experiencing high growth rates, but in the US inflationary pressures are being felt on the brink of a recession. The main point of the article is that the Fed plans on trying to expand output to speed growth back to where it was previous to its decline, but this could cause even more inflationary pressure in the US economy.
In order to expand output, the Fed must expand the money supply. They will do this by a number of ways such as buying bonds and foreign currency, lowering banks’ reserve ratios, and lowering the rate at which banks can borrow money from them. The introduction of more money into the economy will cause inflation to rise. This is not stopping the Fed from taking action. The author of the article states, “The Fed is gambling that inflation expectations will not take off in an environment where business and consumers think the US is close to recession.” Hopefully the Fed doesn’t cause more harm to the economy by trying to help it.
Stagflation is another problem addressed in this article. Stagflation is inflation met with a decrease in output. The question is should the Fed try to address the problem of sluggish growth at the expense of inflation, or should the market be left alone to possibly correct itself? The answer to this question depends on if we are willing to deal with a poorer than normal economy while we wait around for the market to get back into shape. Things could possibly get worse before they get better. The economy could stay sluggish for years before it rebounds. Another thought on this is that maybe the market is already trying to correct itself. Perhaps since the US has been growing at such a significant rate a recession is needed to ward away inflationary pressures.
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