Postings and assignments for students in Econ 3334 at UH
Friday, April 18, 2008
Inflation
This article talks about rising consumer prices. If you model this as a shift upward in the SRAS curve, what do you predict will happen to output in the short run and the long run? What will happen to prices long run?
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This article’s main point is about the CPI going up. CPI stands for consumer price index. It is a tool used to measure fluctuations in the overall prices. The CPI is made up of a basket of fixed goods. This basket is then given a set year of prices which can be used to then determine the change in prices. The article mentions that some of the components of the CPI are going down. There are still more components of the CPI going up though, so says the article. The article then credit’s a part of the increase in prices due to the housing market at the current time. It also mentions that due to this increase in the CPI, there is a good chance that the Fed will cut the interest rates more.
If the Fed cuts interest rates more there will be a spark of investment. Lower interest rates means that banks will be able to loan out more money to companies. More money for companies to spend means that there will be more jobs and overall output will be higher.
If this change in inflation was to cause short run aggregate supply, or SRAS, to go up there would be changes in output and the prices. The short term change in output would be a small decrease. There is no long term change in output. Output would slowly move back to where it was after the shock. The short term and long term change on prices are both increase. This change in price happens because even after output has returned to normal, the prices are still higher then where they were at the beginning.
I really don’t think that this much of a change in the CPI is something to panic about. I would hope that with the increase in the price there is some kind of increase in the standard of living. Also, since the CPI basket is fixed the amount of inflation it comes up with does not fully represent all items, although it probably hit’s a good portion of each section.
The article focuses on the CPI and the impact that it has in relation to core prices. Core prices are essentially the effects of the CPI without many of the more volatile goods included that could give a false reading of the average basket of goods. CPI inflation is roughly at 4%, which is 2% higher than the Federal government would like it to be at.
These worrisome statistics lead some to believe that rate cuts are in order by the Fed. These rate cuts would alleviate some of the pains that consumers are facing and would hopefully spark an increase in consumer purchases. In addition to this, many analysts feel that the real estate dive will continue, with more and more foreclosures along the way.
Essentially this is a short run supply shock on the markets. Because of the limited aggregate supply, or SRAS, there would be a decrease in output. Prices will remain higher from the inflation, but in the long haul supply should shift back to its mean. If the Fed was to lower interest rates, there would be more loanable funds and more spending, which would lead to more output. I conclude that this is something the Fed must consider, especially considering the bear market.
The article is about how rising petrol prices has are putting pressure on U.S shoppers that are struggling with a weak labor market and undervalued housing prices. This article is about rising consumer prices and analyzes how the increasing CPI (consumer price index) effects all aspects of economic consumption. Such as the sub-prime mortgage crisis,and soaring food and energy cost. Consumer price index is the measure of the change in cost of a fixed basket of goods and services. An increase in the CPI will pressure the Federal Reserve to keep cutting interest rates to help a domestic economic slowdown.
nflation can come from several sources: Some come direct from the domestic economy, for example the decisions of the major utility companies providing electricity or gas or water on their prices for the year ahead, or the pricing strategies of the leading food retailers based on the strength of demand and competitive pressure in their markets. A rise in government VAT would also be a cause of increased domestic inflation because it increases a firm’s production costs.
Inflation can also come from external sources, for example an unexpected rise in the price of crude oil or other imported commodities, foodstuffs and beverages. Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of sterling might cause higher import prices – which feeds through directly into the consumer price index.
The SRAS curve absolutely must shift until this long-run equilibrium is reached. If we model this as a shift upward in the SRAS curve, Good expectation will lead to AD shift to right short run. The economy is at inflation gap. Then in the long run, SRAS shifts the left and return the long-run equilibrium.
According to the article, the CPI is indicating that prices are going up. In March alone, the increase was 0.3 percent. The article also talks about expectations that the price will continue to rise and that the FED will most likely continue to decrease the interest rate. Many factors are contributing to the instability of the economy such as an increase in net exports, a decrease in the exchange rate, and an increase in factors of production. Also, economists are expecting MPC (consumption) to fall. What the FED wants to do is to get people to spend more, and if inflation continues to rise, this goal will be difficult.
The inflation that is described in the article can be explained by the Closed Economy IS/LM model which has a downward sloping aggregate demand curve and an upward sloping short run aggregate supply curve. The curves are used to determine the current equilibrium price and output, as well as the expected equilibrium price and output. Allow me to explain the causes of the price rise in a sequential manner.
1. The FED lowers the interest rate by buying bonds. In the Money Market, r decreases and m/p increases.
2. The IS/LM reflects the Fed’s actions as a downward shift of the LM curve. R decreases and Y increases.
3. The increase in actual output is accompanied by a short run increase in price as the Aggregate Demand curve shifts upward in the AS/AD model. In the article, the CPI has measured this price inflation as a 0.3 percent increase in March.
Note: The output derived by the Short Run Aggregate Supply curve is determined by the potential output plus an adjustment to prices and expectations. Y= Ybar + alpha (P - expected P)
4. The short run increase in price alerts investors and analysts that the prices could likely continue to rise and so they increase their expectations, specifically, expected P increases. The second increase in price is reflected by the Short Run Aggregate Supply curve that shifts up so that potential output falls back to the original output level. The shift also represents the expected inflation for the period as well as the long run equilibrium price and output level when the FED makes an interest rate cut.
Understanding the process that occurs when the FED makes an economic decision is important for many reasons. First, investors and firms can make market decisions based of the expectations from the model. Second, the inflation calculated from this model can be used to explain the inverse relation between inflation and unemployment shown in the Phillips Curve, an important trade off for policy makers. Third, the nominal interest rate is affected because expected inflation and real interest rate are used to calculate it. Real interest rate and nominal interest rate can be different from each other and can move in different directions from each other.
I think it is kind of unfair that expectations play into the decisions of the FED. Just imagine if your chess opponent expected your next move then your actions would be useless. Therefore, the FED should brainstorm ways to correct this nuisance. For example, the FED should branch out into smaller divisions that can each independently inject money into specific regions of the country. Investors will have a hard time predicting the actions of the FED if its actions are decentralized.
This article from Financial Times mainly focused on the increasing CPI and the CPI is made up of a basket of fixed goods. Due to the increase in the CPI, that is likely that the Fed will cut the interest rates more. Federal Reserve chairman Ben Bernanke was unsure about the inflation had increased, suggested more rate cuts could follow. According to the article, CPI inflation is roughly at 4%, which is 2% higher than the Federal government would like it to be at. Rising consumer prices cause shift upward in the SRAS curve so in the short run, the nominal wage rate is taken as fixed. Thus, rising average price level implies higher profits that justify expansion of output. In the long run, on the other hand, the nominal wage rate varies with economic conditions. High unemployment leads to falling nominal wages and vice-versa. This is used to justify a vertical aggregate supply curve in the long run. I have noticed the recent spate of articles and news documenting the rise in global food prices. Rise in global food prices and agricultural commodities that seem to have taken much of the world by surprise. The consumption of food and grains is huge in developing countries like China and India, and across the globe and caused the increasing supply and demand. Inflation rate lags the economy and there is nothing like a severe recession to bring the headline CPI rate crashing down. The inflation exists simply because Bernanke’s increase of money supply and making the dollars weak. Inflation is not good to the world, collapsing currency is not good to the world and it will end up making the recession worse.
This article touches on a variety of topics, as it should to give a broad outlook on the economy. The author was smart to give a broad checkup when writing about our advanced economy that runs in conjunction with our banking system. Bryant discusses Consumer Price Indexes, Inflationary Rates, Energy Indexing, Interest Rates and Exports and U.S. production.
As we know as economist that a broad perspective is a more accurate description. CPI seems to be very low given the current state of the economy this is a great sign thus far that the cut in r, the same as increasing the MS is helping to fight off inflation. An increase in the $ and MV we see the $ devalue in the international markets, thus cheapening the prices of U.S. goods. It is to the U.S. in our current state to raise exports and lighten the load of the housing crisis by this increase in MS.
Their remains a problem however, that businesspersons do not realize that economist are the genius of our system. Without their cooperation, however there is a failure in the machine. We should be increasing the loanable funds market, but if the money is not released, there is a break down. Therefore, it is important that we work as a cohesive group. Bryant discusses that building permits are “down” so if you cannot get funding then this would be obvious!
As we know that, the economy is a self-fulfilling prophecy. If you think there is a recession then what happens? Recession! Well-expected prices are going up because people expect prices to go up; therefore, SRAS and SRAD will increase. However, in the end we see prices rise and output go back to its equilibrium.
One more thing, for those “oil producers” like OPEC. You are shooting yourself and your people in the gut! We are THE major food producer your higher fuel prices translates to higher food and water (Saudis) to you.
Again, we should work together as a cohesive unit instead of playing who has the biggest balls game! Maybe it is time to inject ourselves with a little estrogen.
This article is about the consumer price index going up. This index is made up of a basket of fixed goods and measures changes in overall prices. Part of the increase in prices is because of the housing market. It is important to keep in mind that the fed may cut interest rates in an attempt to increase investment. Banks will be able to loan out more money to companies and individuals which will in turn create more jobs and increase output. The SRAS curve will have to shift in order to reach equilibrium. Inflation must be taken into account and if it occurs the SRAS curve will shift to the left. Inflation can come from an increase in a firms production cost. It can also result from changes in exchange rates or higher prices in commodities. It would ideal for the curve to shift upward which will cause the AD curve to shift to the right. It is important for investors and firms to understand this so that when the Fed makes decisions, they can be prepared. As we learned in class, economies can be self-fulfilling especially when pertaining to price expectations. When prices increase, so do the SRAS and AD curves. I think this article does a great job of discussing expectations of the FED’s decisions. The must determine the best way to fix the market place and keep everything in order. It is important for the average consumer to comprehend this so that when changes are made, they do not cause shock.
This article discusses the nature of the increase in the Consumer Price Index—meaning to say the increase in amount a family must spend on subsistence in a given year as determined by the price of a basket of goods compared to the prices of a base year. In the month of March alone, a .3% increase in prices was noted and current future expectations of prices indicate that this will continue. With fears of a recession, rising inflation only worsens the likely increase in the marginal propensity to save, resulting in a reduction in consumption. To counter this, the Fed has imposed numerous rate cuts to spur increased spending and borrowing. As inflation continues to occur, it becomes even more likely that the fed will impose more cuts.
Additional cuts may cause greater investment, as lower rates mean that a bank will be able to loan more money to companies with which to purchase infrastructure and grow. This in turn allows companies to employ more people, combating unemployment and increasing output. This is represented on the IS/LM model by an increase in r causing an increase in the money supply. This shifts the LM curve down, indicating an increase in output. In the AS/AD model, this is reflected by a shift to the right on short-run aggregate demand, causing higher prices and higher output. To counter this, the market responds to the higher price with an gradual shift to the left of the short run aggregate supply curve until the new equilibrium coincides with the long run aggregate supply.
The problem with this is predictability. There are only so many actions the fed can do and, because of instant communications and volatile markets, the slow shift in the aggregate supply that is meant to occur can instead occur instantly. Worse than this, if the Fed warns that they will increase rates before they do, the economy will react preemptively to the rate cut, causing the SRAS curve to shift before the demand curve does, lowering output and worsening the economy.
This article is troublesome in that it is framed in such a way as to cause calamity, not calm analysis of the problem. Yes, inflation is occurring and no, this is not necessarily bad. According to the Phillips curve, higher inflation generally means lower unemployment.
This article discusses the rising prices which is adding to all the other problems that our economy is facing currently. This article blames the rising oil prices, a weakening labor market and slumping housing prices for this rise. This rising Consumer Price Index has led to the expectations that the Fed will continue to cut the interest rates. The Fed would continue to cut the interest rates as a method to resuscitate our falling economy. This is all happening as the dollar continues to lose value, it just recently hit an all time low against the Euro. The consumer price inflation now stands at four percent which is much higher then the Fed’s preferred two percent. This increase in inflation could limit the Fed’s ability to maneuver in this current economic crisis. It has mainly been energy cost that have fueled the inflation. Also in March housing starts plunged by almost twelve percent to reach a seventeen year low. Economist expect further declines in the summer. There is some good news though, coming out after all these bad economic indicators. Strong exports has allowed the manufacturing sector to continue to prosper in these trying times.
If the Fed decides to cut interest rates further then that will lead to a downward shift in the in the LM curve. Actual output will increase due to his shift. Also short run prices will also rise. This is now several months running that the Fed has at least considered the idea of cutting interest. Indeed they have already cut interest this year. This has not lead to a solution to the current rising price problem, so I do not see why they think by doing it again that would being about that solution.
The article, ”Rising prices add to US consumer woes” describes how consumer prices have increased and the value of the dollar has decreased its value. The article comments on how the consumer price index increased 0.3 per cent in the previous month and interest rates will be decreased. The Federal Reserve has taken into account how the core prices are increasing and so they haven taken measures in decreasing the interest rates to slow domestic economic growth. Also the article talks about inflation increasing and how this will slow the US economy. Reasons why inflation has occurred is the increase in energy cost which its energy index has increased1.9 per cent. Other factors that have also led to inflation are the increase in food index as well as household expenses and airfare. An economist named Ian Shepherdson believes it is too soon to indicate inflation. Even though this economist believes it is too soon to think there is inflation, the article gives examples to housing rising 11.9 to 947,000. Which many economists believe housing would have rose in the next 17 years. Also the article speaks of foreclosures being very high at 57 per cent. The article states at the end how exports have helped manufactures go through this period of inflation. Since inflation measures the speed of prices increasing, there are many factors that affect this situation. One of the effects is that the growth rate would decrease as well as the unemployment rate increasing. Inflation also causes income to decrease. For instance, the article talked about the increase in foreclosed houses due to inflation. If the unemployment rate increases a families income will decrease and the ability to support a mortgage would be very difficult. If I would model this in a SRAS graph and I would shift this upward, in the short run prices would increase and output would decrease. In the long run a shift upward would only affect the price level and not the output. In my opinion, there has been an increase in prices as well as the increase in foreclosure homes due to inflation. Gas prices have drastically.
“Rising prices add to US consumer woes” by Chris Byrant is an article dealing with an increasing CPI. CPI is the consumer price index. It is a fixed basket of goods that does not change from year to year, only prices change. It measures inflation and determines if people are better or worse off. Some items in the basket have risen while others have fallen. This is to be expected. Nothing remains constant forever. Part of the increase in prices comes from the housing bubble. The overall inflation was 4%; that is just 2% higher than the Fed would like it to be. This is causing people to feel poorer. The Fed is planning on cutting the interest rate. They will do this by selling bonds on the market and increasing the money market. Lower interest rates will make it so people are persuaded to save less and spend more. Investment will rise as people will have to pay back lower amounts of interest. With high inflation people are expecting prices to go up. The SRAS curve will shift up. With lower interest rates, the AD curve will shift right as more people are willing to consume. This will result in higher prices in the short and long run. In the short run we will see a boost in the economy. Inflation just being 2% over what the Fed would like is nothing to panic about. There is always going to be times of higher inflation. The economy will eventually work itself out and we will be at normal levels again. People should start to panic when inflation reaches 9-10%.
This article discusses the buying power of the American consumer or also known as the CPI. It list each sector such as the food, energy, apparel and states that each sector is hit with some inflation. Some not as high as fear and some surpassing the expectations. As the CPI increases the more likely the Fed will intervene and cut interest rates.
Cutting the interest rate thus trying to increase income, is an effort to combat the higher prices. In the long run the prices will stay high as the income level tries to catch up. In the mean time even though we are experiencing inflation the, weaker dollar has become attractive for trade thus keeping the manufacturing sector relatively healthy.
Since we can expect for energy cost to continue upward in the near future, we can also expect the cost of all goods to increase as well because it take energy to transport them from place to place. That means the Fed better be prepared because it is almost assured that prices will continue higher.
This article talks about the CPI (Consumer Price Index) that is not increasing at an alarming level but the core CPI has some components that are increasing and are affecting us. as a reaction to this the Fed is deciding on cutting the interest rates to help with this situation. Further more, this whole situation is making the SRAS (Short Run Aggregated Supply) to move upwards. This is in a way alarming in the short run because it will increase the prices and lower output in the short run. But as time goes on the price will increase more as people expected but so will output will go back to it's normal state. having consider this, even tho CPI does not account for many good in it's basket. It still gives us a pretty good idea on where the economy is at the moment, but most important it help us take action depending on the inflation looks.
The article focuses on the CPI and the impact that it has in relation to core prices. Core inflation, or core CPI, is important because this is what the Federal Reserve looks at to decide whether or not to change the Fed Funds rate. Core inflation is simply the Consumer Price Index (CPI) minus food and energy prices. The Fed uses the core CPI because food and energy, specifically gasoline, prices are so volatile month-to-month. On the other hand, the Fed’s tools are so slow-acting. It can take six - 18 months before the effect of a rate change can trickle down into the economy. Inflation is when prices continue to creep upward, usually as a result of overheated economic growth or too much capital in the market chasing too few opportunities. Usually wages creep upwards, also, so that companies can retain good workers. Unfortunately, the wages creep upwards more slowly than do the prices, so that your standard of living can actually decrease. We can also have inflation and deflation by changing the amount of money in the system. If the government decides to print a lot of money, then dollars will become plentiful relative to oranges, just as in our drought situation. Thus inflation is caused by the amount of dollars rising relative to the amount of oranges (goods and services), and deflation is caused by the amount of dollars falling relative to the amount of oranges. The primary job of the Federal Reserve is to control inflation while avoiding recession. The tools it uses are to raise and lower the Fed Funds rate, tighten or relax the amount of money allowed into the market, raise or lower the amount of reserves banks need to keep on hand. The current Fed Chair, Ben Bernanke, has said that the most important role of the Fed, as demonstrated by Greenspan's tenure, is maintaining the public expectations of moderate pricing.
The change in Interest Rates can affect the U.S. Economy Interest rate could mean anything from the Fed Funds rate to any of the Treasury note yields to the 30-year fixed-interest mortgage rate. Since these rates usually move together, the term interest rate usually means any bank lending rate. However, the rates don’t always move in tandem because they are driven by different forces. Variable-interest rate loans are driven by the Fed Funds rate. These rates are directly controlled by the Federal Reserve. Rates on longer-term loans, such as the 15-year and 30-year fixed mortgages, are driven by 1-year, 5-year, and 10-year Treasury note yields. These are auctioned on the open market, and the yields respond to market demand. If there is a great demand for these bonds, then the yields can be low. If there is not much demand, then the yields need to be high to attract investors. Interest rates control the flow of money in the economy. High interest rates curb inflation, but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation. Therefore, you need to know not only whether rates are increasing or decreasing, but what other economic indicators are saying. If interest rates are increasing and the Consumer Price Index (CPI) is decreasing, this means the economy is not overheating, which is good. But, if rates are increasing and GDP is decreasing, the economy is slowing too much, which is bad. If rates are decreasing and GDP is increasing, the economy is speeding up, and that is good. But, if rates are decreasing and the CPI is increasing, the economy is headed towards inflation. I would hope that with the increase in the price there is some kind of increase in the cost of living/salary.
Interest rates affect the economy slowly. When the Fed changes the Fed Funds rate, it can take 12-18 months for the effect of the change to percolate throughout the entire economy. As rates increase, banks slowly lend less, and businesses slowly put off expansion. Similarly, consumers slowly realize they aren't as wealthy as they once were, and put off purchases. Inflation hurts your standard of living because you have to pay more and more for the same goods and services. If your income doesn't increase at the same rate as inflation, you will find your standard of living declining even though you are making more. Also, inflation doesn't impact everything equally, so that some things (such as gas prices) can double while other things (your home) may lose value. For this reason, it makes financial planning more difficult. This consumer spending heats up the economy even more, leading to further inflation - this situation is known as spiraling inflation because it spirals out of control. It is also important if you are holding bonds or Treasury notes. These fixed price assets only give a fixed return each year. As inflation spirals faster than the return on these assets, they become less valuable. As they become less valuable, people rush to sell them, further depreciating their value. As their value becomes lower, the US government is forced to offer higher interest rates to sell them at all. Inflation is really bad for your retirement planning because your target will have to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less and less, so you will need to save more and more. However, everything you buy today costs more, so you have less left-over income available to save. Inflation has another bad side effect....once people start to expect inflation, they will spend now rather than later, because things will only cost more lately. Record high gasoline prices will hurt consumers across the United States, but may not damage the overall economy. Gasoline and oil prices have been hitting new highs, with pump prices averaging nearly $3.52 and oil prices touching $118 United States a barrel for the first time ever. Obviously high gasoline prices are a negative. Escalating food costs have fueled inflation in some countries are pushing leftist governments there to implement price controls and export bans to try to keep costs down. Inflation is caused by a combination of four factors: The supply of money goes up; the supply of other goods goes down. Demand for money goes down. Demand for other goods goes up. These are all classic indicators of were the United States is actually headed.
This article written by Chris Bryant, talks about the different consumer price index values for each category that is affecting the slow down of the US economy. As the prices of raw oil rises it adds onto the United States’ slump making most Americans feel as though they are becoming poorer. Even though they are making the same pay rate, the prices for items such as food seems to be rising more and more. Not only that, Ben Bernanke—current chairman of the Feds—states that the cuts in interest will be more and he also stresses on the uncertainty of the growing inflation. It does not stop here, economists says that there could be room for more decreases. Prices for petrol is no the only thing that is rising, according CPI results from the article price for food and clothing are rising as well. But in contrast the housing prices has taken a downfall from its results in previous years. The topic from the text that relates to this article is the LRAS and SRAS curve. If this was to be modeled with the SRAS shifting upward, then there would very little change to output in the short run as opposed to the nonexistent change in the long run. Even though this article was easy and quick to read, it was filled with too many statistical facts. If only it gave more of an explanation of what is happening rather than just stating facts it would have been more enjoyable to read. But personally, I did not find this article to be intriguing. But the article it did do its job of presenting the reader with useful information about the current condition of the nation’s economy. Also the author did not really put much of his views into the article. It was more of a compilation of statistics and statements from other economists.
The point made by the Financial times is well made, what happens if we are, in fact, in a recession with rising prices? Stagflation was created in the 70's by nearly the same conditions, a rapid rise in petroleum costs which in turn spurs a growth in volatile food and energy prices. These increases in prices, however, don't translate into decreases in demand; food and fuel oil demands are what they are and short run supplies will kick up to alleviate price in the short run, but in the long run the price level will increase overall.
In this article Robert Samuelson states that people need to clam down and not freak out over a possible recession because there is a good chance that there will not be one. He points out that people talk about a possible recession as if we were entering into a depression. Yet consumers are still spending money, pointing out that it is expected that almost 15 million vehicles will be bought which went down 1.5 million compared to 2006, nevertheless 15 million is still a lot. He then points out that even though gas prices are rising, home prices are falling, and there are fewer jobs, but the US has an economy of 14 trillion dollars. He then compares previous recessions and implements that even though the economy has slowed down and if it does go into a recession it will not be anywhere like previous recessions. Next he points out that the same thing is happening with stocks, but it is not so sever as to say that it will fall under a “bear market”. He also points out that politicians are also influencing people into believing that the economy is going into a recession because they tend to exaggerate. He then states that the economy will recover just like any market, for example when housing prices go down, there are more buyers, so sales and construction come up. He ends the article basically by saying that if the economy does fall into a recession it is not big deal because the American people have gone through it before and we always come out of it, if there is anything that Americans need to worry about it would be something that no one knows about.
Samuelson makes a good point in this article I agree with him that if we do fall into a recession it will not be anything knew to the US. If the US has been able to come out of worst situations as the great depression then there is no need to over react. People do need to calm down because panic will only make things worse. I believe people should work on understanding exactly what the economy is going through and not rely on what they hear from others.
This article is talking about the increasing consumer price index. it explains how the inflation rate has affected the real estate sector and brought it to it's lowest point in 17 years. The rise in core prices made the treasury prices record losses but stocks moved higher despite the troubles with the previously mentioned real estate industry. The dollar has sank to an all time low against the Euro.
From my personal experience, other currecies seem be be gaining more value thanks to the fall of the Dollar. Being Nigerian, I usually send money back home and it is no surprise to see that the Dollar is making the Naira( Nigerian currency) look like it is getting value, when it really isn't. The disparity between theair lowest and highest tender is very high.
The article also talks about how the annual rate of unadjusted consumer price inflation now stands at 4 per cent and core prices have risen 2.4 per cent in the past year, well above the Federal Reserve’s 2 per cent preferred upper level.
This inflation shock should not be a cause for alarm. The short rub aggregate supply curve is manipulated in such a way that it is no longer a horizontal line. And tis will cause output to shift to the left thereby decreasing output. However, in the longrun, the SRAS goes back to its natural state.
Inflation is on the rise as prices experience a predicted increase over the past few months. With the housing market still in the dumps, and experiencing a 17 year signature low, the economy struggles with a trend that builds tension on consumer wallets. In March, the Consumer Index met expected inflationary changes registering a .3 percent increase for selected goods and services. The Federal Reserve in response to the predicted shift should be cutting interest rates, creating an economic slowdown. The article it self focuses on the importance associated with the Federal Reserve and the CPI goods and services at hand and how the increase in costs surrounding them directly affects the climate of our economy in relationship to the consumer market.
Of course inflation is a product directly focused on the supply and demand issues, as companies associated with core products (energy and food for example) raise prices against the consumer market. The inelastic product line forces consumers to continue to purchase the goods while the Federal Reserve cuts interest rates in response, which introduces more money to the consumer for other investments. As far as the SRAS is concerned, obviously there is a left shift to be expected, and though the short term effects of inflation are apparent, a general state of equilibrium is to be expected. Most economists seem to agree that though there is a sort of short term system in place there isn’t any direct panic for a long term trend.
I also found it interesting that the changes of the apparel market were in direct opposition to the other goods and services, and even though housing starts were down the stocks rose in value regardless. And even with issues surrounding the sub prime loan crisis, manufacturing at home and the export market is strong throwing it also in opposition of ‘the typical recession’.
Inflation is on the rise as prices experience a predicted increase over the past few months. With the housing market still in the dumps, and experiencing a 17 year signature low, the economy struggles with a trend that builds tension on consumer wallets. In March, the Consumer Index met expected inflationary changes registering a .3 percent increase for selected goods and services. The Federal Reserve in response to the predicted shift should be cutting interest rates, creating an economic slowdown. The article it self focuses on the importance associated with the Federal Reserve and the CPI goods and services at hand and how the increase in costs surrounding them directly affects the climate of our economy in relationship to the consumer market.
Of course inflation is a product directly focused on the supply and demand issues, as companies associated with core products (energy and food for example) raise prices against the consumer market. The inelastic product line forces consumers to continue to purchase the goods while the Federal Reserve cuts interest rates in response, which introduces more money to the consumer for other investments. As far as the SRAS is concerned, obviously there is a left shift to be expected, and though the short term effects of inflation are apparent, a general state of equilibrium is to be expected. Most economists seem to agree that though there is a sort of short term system in place there isn’t any direct panic for a long term trend.
I also found it interesting that the changes of the apparel market were in direct opposition to the other goods and services, and even though housing starts were down the stocks rose in value regardless. And even with issues surrounding the sub prime loan crisis, manufacturing at home and the export market is strong throwing it also in opposition of ‘the typical recession’.
To summarize the article, the author is stating the economy is likely entering into a recession in 2008, pointing to the IMF's official statement of such and other indicating data such as the rising unemployment rate, up to 5.1% in March. Consumer spending which accounts for 70% of GDP, is a main cause of the recession, due to four main reasons: the housing bust, tightening credit market, higher fuel and food costs, and the weakening labor market. America’s previous recessions (1990-91 and 2001) have been “short and shallow” and have typically impacted the world economy. However, with the emerging markets, it may not be so severe this time. However the issue is for how long this global economy could buffer this American downturn, it could cause problems if lasting for several years. The IMF states there is a 25% chance the world economy will also enter a recession due to the financial “asset bubble” crisis which had its biggest shock in 80 years. The article also points out that the rate of job loss has been mild relative to previous recessions. The two reasons for this is: the government being proactive (housing market bail-out, Fed’s significant reduction of interest rates and its support to investment banks) and the changing structure of the world economy (emerging markets reducing America’s impact and the increased exports from the weak dollar). The article is alludes to the fact that the recession may be a lengthier one than previous due to the financial causes which is impacting consumer confidence and spending.
The Fed’s loose monetary policy (in attempts to maintain a low interest rate at home) is an issue to countries that peg / fix their currency to the dollar which will cause their exchange rate will rise. However, the US social environment is pushing for “populism and protectionism.” This would add inflationary pressure in the global economy.
Some economic topics discussed in this article: recession and the effects of consumption to the interest rates. Recession by the book’s definition is a sustained period of falling income (output). With weakening consumption, this increases national savings.
21 comments:
This article’s main point is about the CPI going up. CPI stands for consumer price index. It is a tool used to measure fluctuations in the overall prices. The CPI is made up of a basket of fixed goods. This basket is then given a set year of prices which can be used to then determine the change in prices. The article mentions that some of the components of the CPI are going down. There are still more components of the CPI going up though, so says the article. The article then credit’s a part of the increase in prices due to the housing market at the current time. It also mentions that due to this increase in the CPI, there is a good chance that the Fed will cut the interest rates more.
If the Fed cuts interest rates more there will be a spark of investment. Lower interest rates means that banks will be able to loan out more money to companies. More money for companies to spend means that there will be more jobs and overall output will be higher.
If this change in inflation was to cause short run aggregate supply, or SRAS, to go up there would be changes in output and the prices. The short term change in output would be a small decrease. There is no long term change in output. Output would slowly move back to where it was after the shock. The short term and long term change on prices are both increase. This change in price happens because even after output has returned to normal, the prices are still higher then where they were at the beginning.
I really don’t think that this much of a change in the CPI is something to panic about. I would hope that with the increase in the price there is some kind of increase in the standard of living. Also, since the CPI basket is fixed the amount of inflation it comes up with does not fully represent all items, although it probably hit’s a good portion of each section.
The article focuses on the CPI and the impact that it has in relation to core prices. Core prices are essentially the effects of the CPI without many of the more volatile goods included that could give a false reading of the average basket of goods. CPI inflation is roughly at 4%, which is 2% higher than the Federal government would like it to be at.
These worrisome statistics lead some to believe that rate cuts are in order by the Fed. These rate cuts would alleviate some of the pains that consumers are facing and would hopefully spark an increase in consumer purchases. In addition to this, many analysts feel that the real estate dive will continue, with more and more foreclosures along the way.
Essentially this is a short run supply shock on the markets. Because of the limited aggregate supply, or SRAS, there would be a decrease in output. Prices will remain higher from the inflation, but in the long haul supply should shift back to its mean. If the Fed was to lower interest rates, there would be more loanable funds and more spending, which would lead to more output. I conclude that this is something the Fed must consider, especially considering the bear market.
- Joseph Kelley
The article is about how rising petrol prices has are putting pressure on U.S shoppers that are struggling with a weak labor market and undervalued housing prices. This article is about rising consumer prices and analyzes how the increasing CPI (consumer price index) effects all aspects of economic consumption. Such as the sub-prime mortgage crisis,and soaring food and energy cost. Consumer price index is the measure of the change in cost of a fixed basket of goods and services. An increase in the CPI will pressure the Federal Reserve to keep cutting interest rates to help a domestic economic slowdown.
nflation can come from several sources: Some come direct from the domestic economy, for example the decisions of the major utility companies providing electricity or gas or water on their prices for the year ahead, or the pricing strategies of the leading food retailers based on the strength of demand and competitive pressure in their markets. A rise in government VAT would also be a cause of increased domestic inflation because it increases a firm’s production costs.
Inflation can also come from external sources, for example an unexpected rise in the price of crude oil or other imported commodities, foodstuffs and beverages. Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of sterling might cause higher import prices – which feeds through directly into the consumer price index.
The SRAS curve absolutely must shift until this long-run equilibrium is reached. If we model this as a shift upward in the SRAS curve, Good expectation will lead to AD shift to right
short run. The economy is at inflation gap. Then in the long run, SRAS shifts the left and return the long-run equilibrium.
According to the article, the CPI is indicating that prices are going up. In March alone, the increase was 0.3 percent. The article also talks about expectations that the price will continue to rise and that the FED will most likely continue to decrease the interest rate. Many factors are contributing to the instability of the economy such as an increase in net exports, a decrease in the exchange rate, and an increase in factors of production. Also, economists are expecting MPC (consumption) to fall. What the FED wants to do is to get people to spend more, and if inflation continues to rise, this goal will be difficult.
The inflation that is described in the article can be explained by the Closed Economy IS/LM model which has a downward sloping aggregate demand curve and an upward sloping short run aggregate supply curve. The curves are used to determine the current equilibrium price and output, as well as the expected equilibrium price and output. Allow me to explain the causes of the price rise in a sequential manner.
1. The FED lowers the interest rate by buying bonds. In the Money Market, r decreases and m/p increases.
2. The IS/LM reflects the Fed’s actions as a downward shift of the LM curve. R decreases and Y increases.
3. The increase in actual output is accompanied by a short run increase in price as the Aggregate Demand curve shifts upward in the AS/AD model. In the article, the CPI has measured this price inflation as a 0.3 percent increase in March.
Note: The output derived by the Short Run Aggregate Supply curve is determined by the potential output plus an adjustment to prices and expectations. Y= Ybar + alpha (P - expected P)
4. The short run increase in price alerts investors and analysts that the prices could likely continue to rise and so they increase their expectations, specifically, expected P increases. The second increase in price is reflected by the Short Run Aggregate Supply curve that shifts up so that potential output falls back to the original output level. The shift also represents the expected inflation for the period as well as the long run equilibrium price and output level when the FED makes an interest rate cut.
Understanding the process that occurs when the FED makes an economic decision is important for many reasons. First, investors and firms can make market decisions based of the expectations from the model. Second, the inflation calculated from this model can be used to explain the inverse relation between inflation and unemployment shown in the Phillips Curve, an important trade off for policy makers. Third, the nominal interest rate is affected because expected inflation and real interest rate are used to calculate it. Real interest rate and nominal interest rate can be different from each other and can move in different directions from each other.
I think it is kind of unfair that expectations play into the decisions of the FED. Just imagine if your chess opponent expected your next move then your actions would be useless. Therefore, the FED should brainstorm ways to correct this nuisance. For example, the FED should branch out into smaller divisions that can each independently inject money into specific regions of the country. Investors will have a hard time predicting the actions of the FED if its actions are decentralized.
This article from Financial Times mainly focused on the increasing CPI and the CPI is made up of a basket of fixed goods. Due to the increase in the CPI, that is likely that the Fed will cut the interest rates more. Federal Reserve chairman Ben Bernanke was unsure about the inflation had increased, suggested more rate cuts could follow. According to the article, CPI inflation is roughly at 4%, which is 2% higher than the Federal government would like it to be at.
Rising consumer prices cause shift upward in the SRAS curve so in the short run, the nominal wage rate is taken as fixed. Thus, rising average price level implies higher profits that justify expansion of output. In the long run, on the other hand, the nominal wage rate varies with economic conditions. High unemployment leads to falling nominal wages and vice-versa. This is used to justify a vertical aggregate supply curve in the long run.
I have noticed the recent spate of articles and news documenting the rise in global food prices. Rise in global food prices and agricultural commodities that seem to have taken much of the world by surprise. The consumption of food and grains is huge in developing countries like China and India, and across the globe and caused the increasing supply and demand. Inflation rate lags the economy and there is nothing like a severe recession to bring the headline CPI rate crashing down. The inflation exists simply because Bernanke’s increase of money supply and making the dollars weak. Inflation is not good to the world, collapsing currency is not good to the world and it will end up making the recession worse.
This article touches on a variety of topics, as it should to give a broad outlook on the economy. The author was smart to give a broad checkup when writing about our advanced economy that runs in conjunction with our banking system. Bryant discusses Consumer Price Indexes, Inflationary Rates, Energy Indexing, Interest Rates and Exports and U.S. production.
As we know as economist that a broad perspective is a more accurate description. CPI seems to be very low given the current state of the economy this is a great sign thus far that the cut in r, the same as increasing the MS is helping to fight off inflation. An increase in the $ and MV we see the $ devalue in the international markets, thus cheapening the prices of U.S. goods. It is to the U.S. in our current state to raise exports and lighten the load of the housing crisis by this increase in MS.
Their remains a problem however, that businesspersons do not realize that economist are the genius of our system. Without their cooperation, however there is a failure in the machine. We should be increasing the loanable funds market, but if the money is not released, there is a break down. Therefore, it is important that we work as a cohesive group. Bryant discusses that building permits are “down” so if you cannot get funding then this would be obvious!
As we know that, the economy is a self-fulfilling prophecy. If you think there is a recession then what happens? Recession! Well-expected prices are going up because people expect prices to go up; therefore, SRAS and SRAD will increase. However, in the end we see prices rise and output go back to its equilibrium.
One more thing, for those “oil producers” like OPEC. You are shooting yourself and your people in the gut! We are THE major food producer your higher fuel prices translates to higher food and water (Saudis) to you.
Again, we should work together as a cohesive unit instead of playing who has the biggest balls game! Maybe it is time to inject ourselves with a little estrogen.
This article is about the consumer price index going up. This index is made up of a basket of fixed goods and measures changes in overall prices. Part of the increase in prices is because of the housing market. It is important to keep in mind that the fed may cut interest rates in an attempt to increase investment. Banks will be able to loan out more money to companies and individuals which will in turn create more jobs and increase output.
The SRAS curve will have to shift in order to reach equilibrium. Inflation must be taken into account and if it occurs the SRAS curve will shift to the left. Inflation can come from an increase in a firms production cost. It can also result from changes in exchange rates or higher prices in commodities. It would ideal for the curve to shift upward which will cause the AD curve to shift to the right. It is important for investors and firms to understand this so that when the Fed makes decisions, they can be prepared. As we learned in class, economies can be self-fulfilling especially when pertaining to price expectations. When prices increase, so do the SRAS and AD curves.
I think this article does a great job of discussing expectations of the FED’s decisions. The must determine the best way to fix the market place and keep everything in order. It is important for the average consumer to comprehend this so that when changes are made, they do not cause shock.
This article discusses the nature of the increase in the Consumer Price Index—meaning to say the increase in amount a family must spend on subsistence in a given year as determined by the price of a basket of goods compared to the prices of a base year. In the month of March alone, a .3% increase in prices was noted and current future expectations of prices indicate that this will continue. With fears of a recession, rising inflation only worsens the likely increase in the marginal propensity to save, resulting in a reduction in consumption. To counter this, the Fed has imposed numerous rate cuts to spur increased spending and borrowing. As inflation continues to occur, it becomes even more likely that the fed will impose more cuts.
Additional cuts may cause greater investment, as lower rates mean that a bank will be able to loan more money to companies with which to purchase infrastructure and grow. This in turn allows companies to employ more people, combating unemployment and increasing output. This is represented on the IS/LM model by an increase in r causing an increase in the money supply. This shifts the LM curve down, indicating an increase in output. In the AS/AD model, this is reflected by a shift to the right on short-run aggregate demand, causing higher prices and higher output. To counter this, the market responds to the higher price with an gradual shift to the left of the short run aggregate supply curve until the new equilibrium coincides with the long run aggregate supply.
The problem with this is predictability. There are only so many actions the fed can do and, because of instant communications and volatile markets, the slow shift in the aggregate supply that is meant to occur can instead occur instantly. Worse than this, if the Fed warns that they will increase rates before they do, the economy will react preemptively to the rate cut, causing the SRAS curve to shift before the demand curve does, lowering output and worsening the economy.
This article is troublesome in that it is framed in such a way as to cause calamity, not calm analysis of the problem. Yes, inflation is occurring and no, this is not necessarily bad. According to the Phillips curve, higher inflation generally means lower unemployment.
This article discusses the rising prices which is adding to all the other problems that our economy is facing currently. This article blames the rising oil prices, a weakening labor market and slumping housing prices for this rise. This rising Consumer Price Index has led to the expectations that the Fed will continue to cut the interest rates. The Fed would continue to cut the interest rates as a method to resuscitate our falling economy. This is all happening as the dollar continues to lose value, it just recently hit an all time low against the Euro. The consumer price inflation now stands at four percent which is much higher then the Fed’s preferred two percent. This increase in inflation could limit the Fed’s ability to maneuver in this current economic crisis. It has mainly been energy cost that have fueled the inflation. Also in March housing starts plunged by almost twelve percent to reach a seventeen year low. Economist expect further declines in the summer. There is some good news though, coming out after all these bad economic indicators. Strong exports has allowed the manufacturing sector to continue to prosper in these trying times.
If the Fed decides to cut interest rates further then that will lead to a downward shift in the in the LM curve. Actual output will increase due to his shift. Also short run prices will also rise. This is now several months running that the Fed has at least considered the idea of cutting interest. Indeed they have already cut interest this year. This has not lead to a solution to the current rising price problem, so I do not see why they think by doing it again that would being about that solution.
James Walsh T-Th 1 to 2:30
The article, ”Rising prices add to US consumer woes” describes how consumer prices have increased and the value of the dollar has decreased its value. The article comments on how the consumer price index increased 0.3 per cent in the previous month and interest rates will be decreased. The Federal Reserve has taken into account how the core prices are increasing and so they haven taken measures in decreasing the interest rates to slow domestic economic growth. Also the article talks about inflation increasing and how this will slow the US economy. Reasons why inflation has occurred is the increase in energy cost which its energy index has increased1.9 per cent. Other factors that have also led to inflation are the increase in food index as well as household expenses and airfare. An economist named Ian Shepherdson believes it is too soon to indicate inflation. Even though this economist believes it is too soon to think there is inflation, the article gives examples to housing rising 11.9 to 947,000. Which many economists believe housing would have rose in the next 17 years. Also the article speaks of foreclosures being very high at 57 per cent. The article states at the end how exports have helped manufactures go through this period of inflation.
Since inflation measures the speed of prices increasing, there are many factors that affect this situation. One of the effects is that the growth rate would decrease as well as the unemployment rate increasing. Inflation also causes income to decrease. For instance, the article talked about the increase in foreclosed houses due to inflation. If the unemployment rate increases a families income will decrease and the ability to support a mortgage would be very difficult.
If I would model this in a SRAS graph and I would shift this upward, in the short run prices would increase and output would decrease. In the long run a shift upward would only affect the price level and not the output.
In my opinion, there has been an increase in prices as well as the increase in foreclosure homes due to inflation. Gas prices have drastically.
“Rising prices add to US consumer woes” by Chris Byrant is an article dealing with an increasing CPI. CPI is the consumer price index. It is a fixed basket of goods that does not change from year to year, only prices change. It measures inflation and determines if people are better or worse off. Some items in the basket have risen while others have fallen. This is to be expected. Nothing remains constant forever. Part of the increase in prices comes from the housing bubble. The overall inflation was 4%; that is just 2% higher than the Fed would like it to be. This is causing people to feel poorer.
The Fed is planning on cutting the interest rate. They will do this by selling bonds on the market and increasing the money market. Lower interest rates will make it so people are persuaded to save less and spend more. Investment will rise as people will have to pay back lower amounts of interest.
With high inflation people are expecting prices to go up. The SRAS curve will shift up. With lower interest rates, the AD curve will shift right as more people are willing to consume. This will result in higher prices in the short and long run. In the short run we will see a boost in the economy.
Inflation just being 2% over what the Fed would like is nothing to panic about. There is always going to be times of higher inflation. The economy will eventually work itself out and we will be at normal levels again. People should start to panic when inflation reaches 9-10%.
This article discusses the buying power of the American consumer or also known as the CPI. It list each sector such as the food, energy, apparel and states that each sector is hit with some inflation. Some not as high as fear and some surpassing the expectations. As the CPI increases the more likely the Fed will intervene and cut interest rates.
Cutting the interest rate thus trying to increase income, is an effort to combat the higher prices. In the long run the prices will stay high as the income level tries to catch up. In the mean time even though we are experiencing inflation the, weaker dollar has become attractive for trade thus keeping the manufacturing sector relatively healthy.
Since we can expect for energy cost to continue upward in the near future, we can also expect the cost of all goods to increase as well because it take energy to transport them from place to place. That means the Fed better be prepared because it is almost assured that prices will continue higher.
This article talks about the CPI (Consumer Price Index) that is not increasing at an alarming level but the core CPI has some components that are increasing and are affecting us. as a reaction to this the Fed is deciding on cutting the interest rates to help with this situation.
Further more, this whole situation is making the SRAS (Short Run Aggregated Supply) to move upwards. This is in a way alarming in the short run because it will increase the prices and lower output in the short run. But as time goes on the price will increase more as people expected but so will output will go back to it's normal state.
having consider this, even tho CPI does not account for many good in it's basket. It still gives us a pretty good idea on where the economy is at the moment, but most important it help us take action depending on the inflation looks.
The article focuses on the CPI and the impact that it has in relation to core prices. Core inflation, or core CPI, is important because this is what the Federal Reserve looks at to decide whether or not to change the Fed Funds rate. Core inflation is simply the Consumer Price Index (CPI) minus food and energy prices. The Fed uses the core CPI because food and energy, specifically gasoline, prices are so volatile month-to-month. On the other hand, the Fed’s tools are so slow-acting. It can take six - 18 months before the effect of a rate change can trickle down into the economy. Inflation is when prices continue to creep upward, usually as a result of overheated economic growth or too much capital in the market chasing too few opportunities. Usually wages creep upwards, also, so that companies can retain good workers. Unfortunately, the wages creep upwards more slowly than do the prices, so that your standard of living can actually decrease. We can also have inflation and deflation by changing the amount of money in the system. If the government decides to print a lot of money, then dollars will become plentiful relative to oranges, just as in our drought situation. Thus inflation is caused by the amount of dollars rising relative to the amount of oranges (goods and services), and deflation is caused by the amount of dollars falling relative to the amount of oranges. The primary job of the Federal Reserve is to control inflation while avoiding recession. The tools it uses are to raise and lower the Fed Funds rate, tighten or relax the amount of money allowed into the market, raise or lower the amount of reserves banks need to keep on hand. The current Fed Chair, Ben Bernanke, has said that the most important role of the Fed, as demonstrated by Greenspan's tenure, is maintaining the public expectations of moderate pricing.
The change in Interest Rates can affect the U.S. Economy
Interest rate could mean anything from the Fed Funds rate to any of the Treasury note yields to the 30-year fixed-interest mortgage rate. Since these rates usually move together, the term interest rate usually means any bank lending rate. However, the rates don’t always move in tandem because they are driven by different forces. Variable-interest rate loans are driven by the Fed Funds rate. These rates are directly controlled by the Federal Reserve. Rates on longer-term loans, such as the 15-year and 30-year fixed mortgages, are driven by 1-year, 5-year, and 10-year Treasury note yields. These are auctioned on the open market, and the yields respond to market demand. If there is a great demand for these bonds, then the yields can be low. If there is not much demand, then the yields need to be high to attract investors. Interest rates control the flow of money in the economy. High interest rates curb inflation, but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation. Therefore, you need to know not only whether rates are increasing or decreasing, but what other economic indicators are saying.
If interest rates are increasing and the Consumer Price Index (CPI) is decreasing, this means the economy is not overheating, which is good. But, if rates are increasing and GDP is decreasing, the economy is slowing too much, which is bad. If rates are decreasing and GDP is increasing, the economy is speeding up, and that is good. But, if rates are decreasing and the CPI is increasing, the economy is headed towards inflation. I would hope that with the increase in the price there is some kind of increase in the cost of living/salary.
Interest rates affect the economy slowly. When the Fed changes the Fed Funds rate, it can take 12-18 months for the effect of the change to percolate throughout the entire economy. As rates increase, banks slowly lend less, and businesses slowly put off expansion. Similarly, consumers slowly realize they aren't as wealthy as they once were, and put off purchases. Inflation hurts your standard of living because you have to pay more and more for the same goods and services. If your income doesn't increase at the same rate as inflation, you will find your standard of living declining even though you are making more. Also, inflation doesn't impact everything equally, so that some things (such as gas prices) can double while other things (your home) may lose value. For this reason, it makes financial planning more difficult. This consumer spending heats up the economy even more, leading to further inflation - this situation is known as spiraling inflation because it spirals out of control. It is also important if you are holding bonds or Treasury notes. These fixed price assets only give a fixed return each year. As inflation spirals faster than the return on these assets, they become less valuable. As they become less valuable, people rush to sell them, further depreciating their value. As their value becomes lower, the US government is forced to offer higher interest rates to sell them at all. Inflation is really bad for your retirement planning because your target will have to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less and less, so you will need to save more and more. However, everything you buy today costs more, so you have less left-over income available to save.
Inflation has another bad side effect....once people start to expect inflation, they will spend now rather than later, because things will only cost more lately. Record high gasoline prices will hurt consumers across the United States, but may not damage the overall economy. Gasoline and oil prices have been hitting new highs, with pump prices averaging nearly $3.52 and oil prices touching $118 United States a barrel for the first time ever. Obviously high gasoline prices are a negative. Escalating food costs have fueled inflation in some countries are pushing leftist governments there to implement price controls and export bans to try to keep costs down. Inflation is caused by a combination of four factors: The supply of money goes up; the supply of other goods goes down. Demand for money goes down. Demand for other goods goes up. These are all classic indicators of were the United States is actually headed.
This article written by Chris Bryant, talks about the different consumer price index values for each category that is affecting the slow down of the US economy. As the prices of raw oil rises it adds onto the United States’ slump making most Americans feel as though they are becoming poorer. Even though they are making the same pay rate, the prices for items such as food seems to be rising more and more. Not only that, Ben Bernanke—current chairman of the Feds—states that the cuts in interest will be more and he also stresses on the uncertainty of the growing inflation. It does not stop here, economists says that there could be room for more decreases. Prices for petrol is no the only thing that is rising, according CPI results from the article price for food and clothing are rising as well. But in contrast the housing prices has taken a downfall from its results in previous years.
The topic from the text that relates to this article is the LRAS and SRAS curve. If this was to be modeled with the SRAS shifting upward, then there would very little change to output in the short run as opposed to the nonexistent change in the long run.
Even though this article was easy and quick to read, it was filled with too many statistical facts. If only it gave more of an explanation of what is happening rather than just stating facts it would have been more enjoyable to read. But personally, I did not find this article to be intriguing. But the article it did do its job of presenting the reader with useful information about the current condition of the nation’s economy. Also the author did not really put much of his views into the article. It was more of a compilation of statistics and statements from other economists.
Hang Nguyen
The point made by the Financial times is well made, what happens if we are, in fact, in a recession with rising prices? Stagflation was created in the 70's by nearly the same conditions, a rapid rise in petroleum costs which in turn spurs a growth in volatile food and energy prices. These increases in prices, however, don't translate into decreases in demand; food and fuel oil demands are what they are and short run supplies will kick up to alleviate price in the short run, but in the long run the price level will increase overall.
In this article Robert Samuelson states that people need to clam down and not freak out over a possible recession because there is a good chance that there will not be one. He points out that people talk about a possible recession as if we were entering into a depression. Yet consumers are still spending money, pointing out that it is expected that almost 15 million vehicles will be bought which went down 1.5 million compared to 2006, nevertheless 15 million is still a lot. He then points out that even though gas prices are rising, home prices are falling, and there are fewer jobs, but the US has an economy of 14 trillion dollars. He then compares previous recessions and implements that even though the economy has slowed down and if it does go into a recession it will not be anywhere like previous recessions. Next he points out that the same thing is happening with stocks, but it is not so sever as to say that it will fall under a “bear market”. He also points out that politicians are also influencing people into believing that the economy is going into a recession because they tend to exaggerate. He then states that the economy will recover just like any market, for example when housing prices go down, there are more buyers, so sales and construction come up. He ends the article basically by saying that if the economy does fall into a recession it is not big deal because the American people have gone through it before and we always come out of it, if there is anything that Americans need to worry about it would be something that no one knows about.
Samuelson makes a good point in this article I agree with him that if we do fall into a recession it will not be anything knew to the US. If the US has been able to come out of worst situations as the great depression then there is no need to over react. People do need to calm down because panic will only make things worse. I believe people should work on understanding exactly what the economy is going through and not rely on what they hear from others.
This article is talking about the increasing consumer price index. it explains how the inflation rate has affected the real estate sector and brought it to it's lowest point in 17 years. The rise in core prices made the treasury prices record losses but stocks moved higher despite the troubles with the previously mentioned real estate industry. The dollar has sank to an all time low against the Euro.
From my personal experience, other currecies seem be be gaining more value thanks to the fall of the Dollar. Being Nigerian, I usually send money back home and it is no surprise to see that the Dollar is making the Naira( Nigerian currency) look like it is getting value, when it really isn't. The disparity between theair lowest and highest tender is very high.
The article also talks about how the annual rate of unadjusted consumer price inflation now stands at 4 per cent and core prices have risen 2.4 per cent in the past year, well above the Federal Reserve’s 2 per cent preferred upper level.
This inflation shock should not be a cause for alarm. The short rub aggregate supply curve is manipulated in such a way that it is no longer a horizontal line. And tis will cause output to shift to the left thereby decreasing output. However, in the longrun, the SRAS goes back to its natural state.
Inflation is on the rise as prices experience a predicted increase over the past few months. With the housing market still in the dumps, and experiencing a 17 year signature low, the economy struggles with a trend that builds tension on consumer wallets. In March, the Consumer Index met expected inflationary changes registering a .3 percent increase for selected goods and services. The Federal Reserve in response to the predicted shift should be cutting interest rates, creating an economic slowdown. The article it self focuses on the importance associated with the Federal Reserve and the CPI goods and services at hand and how the increase in costs surrounding them directly affects the climate of our economy in relationship to the consumer market.
Of course inflation is a product directly focused on the supply and demand issues, as companies associated with core products (energy and food for example) raise prices against the consumer market. The inelastic product line forces consumers to continue to purchase the goods while the Federal Reserve cuts interest rates in response, which introduces more money to the consumer for other investments. As far as the SRAS is concerned, obviously there is a left shift to be expected, and though the short term effects of inflation are apparent, a general state of equilibrium is to be expected. Most economists seem to agree that though there is a sort of short term system in place there isn’t any direct panic for a long term trend.
I also found it interesting that the changes of the apparel market were in direct opposition to the other goods and services, and even though housing starts were down the stocks rose in value regardless. And even with issues surrounding the sub prime loan crisis, manufacturing at home and the export market is strong throwing it also in opposition of ‘the typical recession’.
Inflation is on the rise as prices experience a predicted increase over the past few months. With the housing market still in the dumps, and experiencing a 17 year signature low, the economy struggles with a trend that builds tension on consumer wallets. In March, the Consumer Index met expected inflationary changes registering a .3 percent increase for selected goods and services. The Federal Reserve in response to the predicted shift should be cutting interest rates, creating an economic slowdown. The article it self focuses on the importance associated with the Federal Reserve and the CPI goods and services at hand and how the increase in costs surrounding them directly affects the climate of our economy in relationship to the consumer market.
Of course inflation is a product directly focused on the supply and demand issues, as companies associated with core products (energy and food for example) raise prices against the consumer market. The inelastic product line forces consumers to continue to purchase the goods while the Federal Reserve cuts interest rates in response, which introduces more money to the consumer for other investments. As far as the SRAS is concerned, obviously there is a left shift to be expected, and though the short term effects of inflation are apparent, a general state of equilibrium is to be expected. Most economists seem to agree that though there is a sort of short term system in place there isn’t any direct panic for a long term trend.
I also found it interesting that the changes of the apparel market were in direct opposition to the other goods and services, and even though housing starts were down the stocks rose in value regardless. And even with issues surrounding the sub prime loan crisis, manufacturing at home and the export market is strong throwing it also in opposition of ‘the typical recession’.
To summarize the article, the author is stating the economy is likely entering into a recession in 2008, pointing to the IMF's official statement of such and other indicating data such as the rising unemployment rate, up to 5.1% in March. Consumer spending which accounts for 70% of GDP, is a main cause of the recession, due to four main reasons: the housing bust, tightening credit market, higher fuel and food costs, and the weakening labor market. America’s previous recessions (1990-91 and 2001) have been “short and shallow” and have typically impacted the world economy. However, with the emerging markets, it may not be so severe this time. However the issue is for how long this global economy could buffer this American downturn, it could cause problems if lasting for several years. The IMF states there is a 25% chance the world economy will also enter a recession due to the financial “asset bubble” crisis which had its biggest shock in 80 years. The article also points out that the rate of job loss has been mild relative to previous recessions. The two reasons for this is: the government being proactive (housing market bail-out, Fed’s significant reduction of interest rates and its support to investment banks) and the changing structure of the world economy (emerging markets reducing America’s impact and the increased exports from the weak dollar). The article is alludes to the fact that the recession may be a lengthier one than previous due to the financial causes which is impacting consumer confidence and spending.
The Fed’s loose monetary policy (in attempts to maintain a low interest rate at home) is an issue to countries that peg / fix their currency to the dollar which will cause their exchange rate will rise. However, the US social environment is pushing for “populism and protectionism.” This would add inflationary pressure in the global economy.
Some economic topics discussed in this article: recession and the effects of consumption to the interest rates. Recession by the book’s definition is a sustained period of falling income (output). With weakening consumption, this increases national savings.
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