Inflation essay sample

Foundation Course

Inflation in the United States
Before the Second World War, the price level in the U. S. has been relatively stable, with the exception of episodes of hyperinflation associated with the financing of the U. S. War of Independence (1775-1783) and the Civil War (1861-1865). Typical were also periods of negative inflation (deflation) during the economic crisis, in particular 1840-x, 1870-x, the Great Depression. After the Second World War has been a steady increase in the price index. The period of significant inflation lasted from 1973 until the early 1980s. Usually it is associated with an oil embargo by OPEC countries. But a little earlier (in 1971) there was a refusal to exchange dollars for gold at a fixed rate, the devaluation of the dollar made by almost 8%, and began the transition to floating exchange rates (see the crisis of the Bretton Woods monetary system).
The United States Consumer Price Index, CPI is considered a key indicator of inflation, and is calculated by measuring the level of prices for consumer goods and services. The data are published monthly statistical office of the Department of Labor United States since 1919. The index is calculated from observations of changes in prices of a wide range of products in urban areas, weighted by the share of total income that consumers spend on their purchase. The statistics at the end of the month in which they are published , are the most popular method of measuring inflation in the United States, however , the index is used primarily targets determining the value of life, rather than a general price index .
During its existence, the method of calculating the index changed repeatedly, adapting to current conditions, such as to reduce the consumption of certain types of food during the war years, the new census data, changing consumption habits. The latest study was conducted specifically established in 1995 Senate Commission (Boskin Commission) to establish the alleged systematic errors of calculation of CPI. The results of the commission were published December 4, 1996 years, according to which the CPI was overvalued by 1. 1 percent in 1996 and 1. 3 percent in the period prior to 1996
Consumer Price Index in the period from 1957 to 2007 increased by more than 7 times , although some products and services may be greater than the numbers , for example:
postage stamp in the 1950s cost 3 cents, in 2007 – 41 cents ( 13. 6 times ) ;
Big Mac hamburger first appeared on the network McDonald’s in 1962 was worth 45 cents, now $ 3. 22 (7. 1 times. Interesting fact is that the magazine « The Economist» uses the so-called Big Mac index to compare the purchasing power of various currencies in 120 countries ) ;
At the time of founding motel chain Motel 6 in Santa Barbara , California, in 1962, the room cost $ 6 ( which is reflected in the title of the network) , now the room rate – $ 110 ( 18. 3 times per area in Santa Barbara on August 2007 year , though the network is still one of the most accessible , with room rate of $ 30 , depending on location and season, for example, in Bakersfield , California in August 2007, the price of the room was $ 34 , which corresponds to an increase of only 5. 6 times ) .
The minimum set by law, wages in the U. S. increased from 75 cents per hour (1950) to 5. 85 dollars per hour (2007) (an increase of 7. 80 times, with a planned increase to U. S. $ 6. 55 in 2008 and to 7 $ 25 in 2009).

Inflation Targeting as One of Tools of Central Bank

Inflation targeting is a set of measures taken by public authorities in order to control inflation in the country.
Inflation targeting has several stages:
The establishment of the inflation target for a certain period (usually a year ) ;
Selection of appropriate monetary instruments to control inflation;
The use of monetary instruments, depending on the current need;
Comparison of the rate of inflation at the end of the reporting period, with the planned and carried out analysis of the effectiveness of monetary policy.
The main instrument of monetary policy to maintain the target level of inflation is the manipulation of the accounting rate (refinancing rate). Thus, the increase in the interest rate raises interest rates at commercial banks and increases the attractiveness of saving money rather than spending. Lowering the discount rate lowers deposit rates at commercial banks and reduces the attractiveness of saving money.
In addition, the increase in the discount rate increases the level of interest rate loans from banks and reduces the demand for loans. Lowering the discount rate allows financial institutions to reduce lending rates. Thus the decrease in the discount rate increases the rate of inflation. Raising the discount rate reduces the rate of inflation.

Inflation in the United States Today

U. S. consumer prices in June rose at the strongest pace in five months; potentially signaling a stabilization of inflation, while the representatives of the Federal Reserve pondering reduction incentives. According to the data, the consumer price index (CPI) in June, adjusted for seasonal variations increased by 0. 5 %. This is evidenced by a report published by the U. S. Department of Labor on Tuesday. Analysts expected an increase of 0. 4 % compared to the previous month. First of all, the general rise in prices has affected a dramatic increase in the cost of gasoline, the price of which is adjusted for seasonal variations, rose 6. 3 % in June compared to May, when gasoline has not changed in price. After a slight increase in the initial stage of economic recovery, prices generally leveled off since last fall. Such moderate inflation pointed to weakening energy prices and modest demand for goods and services by consumers in the United States. Fed officials with increased attention the rates of inflation, as the Central Bank is considering the possibility of folding stimulus in September. Fed chairman Ben Bernanke in a speech before Congress on Wednesday and Thursday will probably have to answer questions about those plans and their impact on prices and the economy as a whole. Paul compared to the same period last year, consumer prices rose by 1. 8 %, almost in line with the target level of the Fed, which is 2 %. However, excluding the volatile food prices and energy prices over the past 12 months, prices have risen by only 1. 6 %, the lowest in the past two years, annual growth. Moderate inflation may be the reason that some officials will demand to remove terms reduction of bond purchases until December or even at a later date. President of the Federal Reserve Bank of St. Louis James Bullard said last week that he was concerned that inflation may rise too slowly and, as a result, the central bank may need to respond appropriately. At the same time, other Fed officials are less skeptical. According to published protocols last week the Fed meeting in June, the control of the central bank noted that “ temporary factors” to keep inflation under control, and expect to gain price increases later this year. Higher inflation will contribute to strengthening the views on strengthening the economy, sufficient to reduce the disturbance of the Fed. The rise in prices in June may indicate a strengthening of demand, which coincides with an increase in optimism about the prospects for the economy. Late last month, index of consumer confidence held near a six-year high. Last month, the overall increase in energy prices was 3. 4 % and food 0. 2 %. Consumer Price Index (Core CPI), which excludes volatile food prices and energy prices in June rose by 0. 2 %. The value of the growth of the underlying index owl with economists’ expectations. Housing costs, which make up about a third of the price index rose 0. 2 % in June. Prices for clothing rose by 0. 9 % over the same period, which was the strong growth of about two years. Consumers also have to pay more in June for prescription drugs and new cars, while the cost of air travel has fallen sharply. In the longer term, weak wage growth may be a factor restraining demand. According to the report, the U. S. Labor Department, weekly earnings, adjusted for inflation, fell in June for the second month in a row. Wage growth during the economic recovery was weak, despite a significant decline in the unemployment rate over the past four years. According to published Federal Reserve of San Francisco documents, employers refrain from raising wages and thus offset the impact of the recession, during which they would like to lower wages, but were unable to do so. Slow wage growth helps to keep inflation under control.
As we may see, the Central Bank could use this situation to use its inflation targeting tools, it may help to stimulate the economy and keep the inflation under control.

Inflation in Canada

Mastering the rate of inflation is the main point of Canadian monetary policy. This level should be between 1 and 3% favored a normal economic growth. To control the level of inflation, the Bank of Canada uses interest rate. If he sees that this level is greater than 3 %, it raises interest rates to curb demand for goods and services. In the opposite case, if the inflation rate falls below a certain threshold, the demand for maintaining the Bank lowers interest rates.
The interval of 1 to 3% of normal is associated with growth in the Bank. This level should be relatively low to facilitate medium-and long-term investment. Inflation directly affects the investments that affect economic growth. ” One of the main advantages of a well-defined goal pursuit of mastering inflation is the influence exerted by it on inflationary expectations. This influence is reflected in the adoption by individuals, businesses and public authorities of the economic decisions that enhance the ability of the economy to show a continuous non-inflationary growth. “

On August, 2013, we can see the following brief information about Canadian level of inflation.

Consumer prices (index CPI) in Canada in July 2013 increased by 0. 1% the previous month, when there was zero inflation. This is according to the statistical office of the country. In annual terms, inflation accelerated to 1. 3% after 1. 2% in June.
Accelerating inflation in June was mainly the increase in tariffs for transport, which rose by 2. 7% year on year, down 0. 3 in July. Petrol price increased by 6. 1% yoy and 1. 3% for the month. Food prices rose by 0. 8% over the year and by 0. 2% over the past month.

Sources

Saint Louis Federal Reserve (2012) ” 5-Year Treasury Inflation-Indexed Security, Constant Maturity” FRED Economic
Bureau of Economic Analysis, Department of Commerce. July 31, 2013 Income and Product Accounts Gross Domestic Product, second quarter 2013 (advance estimate); Comprehensive Revision: 1929 through 1st quarter 2013 http://www. bea. gov/newsreleases/national/gdp/2013/gdp2q13_adv. htm= National Income and Product Accounts Gross Domestic Product, second quarter 2013 (advance estimate); Comprehensive Revision: 1929 through 1st quarter 2013. Retrieved August 1, 2013.
” Doing Business in the United States 2013″. World Bank. Retrieved January 23, 2013.
” World Economic Outlook Database, October 2012″. IMF. Retrieved February 22, 2013.
” United States: International Reserves and Foreign Currency Liquidity”. International Monetary Fund. December 14, 2012. Retrieved January 4, 2013.