Sunday, April 04, 2010

U.S. Inflation Perceptions Differ Based on Perspective

Sources: WSJ: Inflation Fears Cut Two Ways at the Fed; Investopedia: Inflation; New Haven Register: Experts, Public Differ on Inflation Fears.

In an effort to encourage consumerism to combat the aftermath of the financial crisis, the Federal Reserve Bank (“Fed”) has been keeping interest rates at as near to zero percent as is possible. The decision to do so has been a topic of mounting concern for some financial analysts who worry that as a result, economic inflation could occur. Analysts who are in charge of the Fed’s actions worry; however, that the rate of inflation is currently too slow.

In economic terms, the term inflation describes a rise in the general price of goods and services in an economy over a specified time period and the resulting decline of the value of currency in that economy. Most financial analysts agree that high inflation rates are harmful to the economy if the rates occur at a time when the economy is unstable. The present is just such an unstable time as the U.S., as well as the rest of the world, is still recovering from the recent recession.

The divide among financial experts on whether or not the U.S. will experience significant inflation is quite split. A 2009 survey of such experts undertaken by the National Association for Business Economics found that 50 percent were confident that the Fed could limit inflation for the next few years and that 41 percent shared the belief that inflation would most likely rise to high levels within the next few years. While expert opinion was somewhat contended, American consumers were also surveyed and were in agreement that the U.S. inflation rate for 2010 would raise 5.1 percent. If increased at this level, the result could be a devastating halt on U.S. economic recovery.

Why would an inflation rate of 5.1 percent freeze progress in the U.S. economy? Surveys and bond price changes have revealed to economists that on average, the American consumer believes that inflations will increase at about 2 percent a year. A 5 percent increase would noticeably alter the an American consumer’s buying power. Put into context, the Consumer Price Index (“CPI”) has not gone over 5 percent in a single year since 1990 when Iraq invaded Kuwait. The CPI measures the price change for a standard group of goods, which, when calculated, reflects the typical market purchases of an ordinary urban consumer.

The Fed has stated that it will continue to keep short-term rates low for an “extended period” which could mean a few months as long as inflation remains low. Some traders anticipate that the Fed will begin raising federal-fund rates to 0.5 percent by November of 2010. Currently they are at or near zero percent.

Discussion Questions:
1. Have you found evidence in your daily life that inflation is occurring?
2. One of the side effects of inflation is that consumers will hoard their assets until they are worth more in the market. Although this is a logical reaction, what are the ills of a spending freeze?
3. How can a high inflation rate affect the U.S.’s presence in the world economy?

1 comment:

Anonymous said...

All I know is what I read in the news, or have to pay for lunch, but...

1) Yes, inflation is occurring; prices for a hamburger for lunch have gone up twice within the last 12 mos - appx $1 more than before -- appx 20% increase. Not to mention gasoline...

2)I'll do whatever is good for me, I don't care if it's bad for "the economy"; if that means buy gold or stock up on soap, I'll do it. BTW why is it that when poor people save, it 'strangles the economy', but when rich people save, it 'creates a pool of investment capital'?

3) The dollar's 'value' as a reserve currency is un-deserved, I'm guessing that maybe up to 40% of the value of the dollar is 'intangible', and un-sustainable, based on our budget deficits, trade deficits, and economic decline due to the demise of manufacturing, and our profligate spending on destructive and counter-productive military conflicts of our own creation.

And, just when *could* the dollar be de-valued, without creating 'economic instability'? Only during a crisis can radical changes be implemented, even if they are necessary and inevitable. Consider the "new ruble" and the "new peso".