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100 Inflation Essay Topic Ideas & Examples

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Inflation is a key economic indicator that affects the purchasing power of consumers and the overall health of an economy. As such, it is a popular topic for essays and research papers in economics, finance, and related fields. If you are looking for inspiration for your next inflation essay, look no further. Here are 100 inflation essay topic ideas and examples to help you get started:

• The causes and effects of inflation
• The relationship between inflation and unemployment
• The impact of inflation on interest rates
• The role of the Federal Reserve in controlling inflation
• The differences between demand-pull and cost-push inflation
• The effects of hyperinflation on a country's economy
• The impact of inflation on fixed income earners
• The relationship between inflation and the stock market
• The effects of inflation on real estate prices
• The impact of inflation on international trade
• The role of inflation expectations in shaping economic behavior
• The effects of inflation on poverty and income inequality
• The impact of inflation on retirement savings
• The relationship between inflation and economic growth
• The effects of inflation on consumer spending
• The role of inflation in shaping monetary policy decisions
• The impact of inflation on business investment
• The effects of inflation on government finances
• The relationship between inflation and currency exchange rates
• The impact of inflation on the cost of living
• The effects of inflation on social welfare programs
• The role of inflation in causing economic recessions
• The impact of inflation on international competitiveness
• The effects of inflation on the environment
• The relationship between inflation and financial stability
• The role of inflation in shaping government policy decisions
• The impact of inflation on entrepreneurship and innovation
• The effects of inflation on consumer confidence
• The relationship between inflation and technological advancement
• The impact of inflation on the healthcare industry
• The effects of inflation on the education sector
• The role of inflation in shaping consumer behavior
• The impact of inflation on the agricultural sector
• The relationship between inflation and social mobility
• The effects of inflation on urban development
• The role of inflation in shaping labor market dynamics
• The impact of inflation on small businesses
• The effects of inflation on the tourism industry
• The relationship between inflation and government regulations
• The impact of inflation on infrastructure development
• The role of inflation in shaping energy policy
• The effects of inflation on the manufacturing sector
• The relationship between inflation and the digital economy
• The impact of inflation on the gig economy
• The effects of inflation on the sharing economy
• The role of inflation in shaping consumer preferences
• The impact of inflation on the automotive industry
• The relationship between inflation and the housing market
• The effects of inflation on the retail sector
• The impact of inflation on the hospitality industry
• The role of inflation in shaping supply chain dynamics
• The effects of inflation on the fashion industry
• The relationship between inflation and the art market
• The impact of inflation on the entertainment industry
• The effects of inflation on the music industry
• The role of inflation in shaping the sports industry
• The relationship between inflation and the gaming industry
• The impact of inflation on the film industry
• The effects of inflation on the publishing industry
• The role of inflation in shaping the food and beverage industry
• The impact of inflation on the beauty and personal care industry
• The effects of inflation on the health and wellness industry
• The relationship between inflation and the pharmaceutical industry
• The impact of inflation on the technology industry
• The effects of inflation on the telecommunications industry
• The role of inflation in shaping the media industry
• The relationship between inflation and the advertising industry
• The impact of inflation on the e-commerce industry
• The effects of inflation on the transportation industry
• The role of inflation in shaping the logistics industry
• The impact of inflation on the energy industry
• The effects of inflation on the renewable energy industry
• The relationship between inflation and the oil and gas industry
• The impact of inflation on the mining industry
• The effects of inflation on the construction industry
• The role of inflation in shaping the real estate industry
• The relationship between inflation and the property market
• The impact of inflation on the architecture and design industry
• The effects of inflation on the engineering industry
• The role of inflation in shaping the manufacturing industry
• The effects of inflation on the aerospace industry
• The relationship between inflation and the defense industry
• The impact of inflation on the security industry
• The effects of inflation on the law enforcement industry
• The role of inflation in shaping the healthcare industry
• The impact of inflation on the medical devices industry
• The effects of inflation on the biotechnology industry
• The role of inflation in shaping the life sciences industry
• The impact of inflation on the education industry
• The effects of inflation on the e-learning industry
• The relationship between inflation and the edtech industry
• The impact of inflation on the publishing industry
• The effects of inflation on the media and entertainment industry
• The role of inflation in shaping the sports and recreation industry
• The relationship between inflation and the leisure and travel industry
• The impact of inflation on the tourism and hospitality industry
• The effects of inflation on the food and beverage industry
• The role of inflation in shaping the retail and consumer goods industry

These are just a few examples of the many possible topics you could explore in an inflation essay. Whether you are interested in the macroeconomic implications of inflation or its effects on specific industries, there is no shortage of interesting and important questions to investigate. So pick a topic that interests you, do some research, and start writing!

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10 Commonly Asked Questions About Inflation

Introduction

In March, American consumer prices rose 8.5% from 2021, creating the sharpest increase in inflation since 1981. The average national price for gas climbed to an all-time high of $4.33 per gallon in March , driven partially by the ban on Russian oil imports after the country’s invasion of Ukraine. Grocery costs are similarly rising : According to the Consumer Price Index, the cost of meat, fish, poultry, and eggs has increased 13% since February 2021, while fresh fruit prices have gone up more than 11% during the same span. The cost of electricity has increased 11% , while furniture and bedding went up 16%.

With inflation quickly becoming one of the top news stories in 2022, it’s no wonder more consumers are wondering what all this really means for them. PennyWorks examined some of the most commonly asked questions about inflation and provided insight into how it affects the larger economy and your wallet. From the general causes of inflation (and why we’re seeing such high inflation right now) to its effects on earning power and loans, understanding these topics can help you better understand inflation—and how it impacts your finances.

1. What causes inflation?

First, a definition: Simply put, inflation is a decline in purchasing power over time . Inflation can be caused by a variety of factors. For example, it can rise in a hot economy where people have a lot of cash to spend and businesses must raise prices to keep up with demand for their products. However, supply chain issues like the ones we saw as the global economy rebounded from the COVID-19 pandemic in late 2021 can also lead to increased prices. Global conflicts such as Russia’s invasion of Ukraine can create shortages of goods like oil, which in turn cause gas prices to spike.

Inflation is rarely caused by just one factor, so economists and policymakers often have their own interpretations of what exactly causes it. Other possible explanations for the current spike in inflation include a shift in consumer spending, a historical underinvestment in infrastructure, corporate greed, recent government stimulus packages, and rising wages.

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2. Why has inflation been relatively low since 1980?

In the 1980s, high unemployment rates of more than 10% and a severe recession drove inflation down from the historic highs of the 1970s. Since then, inflation has largely remained stable and stayed within the Federal Reserve’s annual target inflation rate of 2% .

During the 1990s, the correlation between low unemployment and high inflation weakened, which forced economists to consider many other factors in the inflation puzzle. Some experts suggest that central banks adapted their monetary policy to combat spikes in inflation, which kept it stable for decades. Others believe workers’ power to advocate for higher wages fell with the decline of labor unions, which kept wage growth stagnant and therefore reduced inflation. The rise of the global supply chain and increased international trade also likely reduced consumer sensitivity to inflation.

3. Will prices go back down to what they were before inflation?

Unfortunately, there is no quick fix for high inflation. The Federal Reserve has begun to raise interest rates , which will make it more expensive to borrow money and should reduce consumer spending. Some industries are beginning to recover from the snags in the supply chain that started in late 2021.

On the other hand, some experts are beginning to report that inflation is becoming more likely to stick around longer , pointing to signs like rising rents and home prices. Overall, many economists predict that inflation will likely stay above the Federal Reserve’s 2% target for the rest of 2021.

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4. Is inflation bad?

While paying higher prices for goods and services doesn’t usually excite consumers, not all experts believe that inflation is always a bad thing. Sharp rises in inflation—also known as hyperinflation —can destabilize economies, leading to hoarding of consumer products, losses of savings, and other societal issues.

Everyone can agree that hyperinflation is a problem, but more moderate increases in inflation are the subject of debate. Inflation can be a boon for small companies that can now charge more for their products, but at the same time, it negatively impacts lenders and people on fixed incomes. Similarly, inflation can help workers if it leads to higher wages, but hurt them if prices go up faster than pay.

5. How does inflation affect my earning power or the value of my salary?

If the prices of goods increase but your paycheck does not, inflation has effectively eroded your purchasing power . In other words, you can’t afford to buy as many products as you previously did.

For example, between September 2020 and September 2021, the consumer price index increased by 5.4% , according to the Bureau of Labor Statistics. Unless you were given a raise of 5.4% or more during that time period, the real-world value of your paycheck actually decreased. On the flip side, when inflation falls, your salary will go further, allowing you to buy more goods and services for the same dollar value.

6. What can I do to “protect” my savings or retirement against inflation?

When inflation increases, the value of cash decreases. That $10 bill can no longer buy you the same amount of groceries or gas it once could. If most of your savings are in cash, you’re effectively losing money over the long term as the power of the dollar diminishes.

In order to protect the buying power of your long-term savings, experts recommend investing in a diversified set of funds to help your money grow over time. Pay close attention to interest rates, as well. The rate hikes that the Federal Reserve has already set in motion should eventually increase the interest rates that banks will pay on savings accounts, in addition to the rates consumers pay on mortgages, credit cards, and other variable rate loans. It might not be worth sinking your cash into a fixed-term savings account with a low rate now if banks will be raising interest rates in the next year.

7. Why can’t the government just print more money?

It seems like a simple solution to the problem of inflation: Just give people more money to make up for the buying power they’re losing. Unfortunately, the economy doesn’t work that way. Historically, printing more money tends to actually increase inflation because there is too much demand (through the new cash) for an unchanged amount of goods.

In other words, increasing the number of bills and coins in circulation would only devalue the U.S. dollar overall. Furthermore, the U.S. government isn’t actually in charge of printing money—our central bank, the Federal Reserve, is. The Federal Reserve operates independently from the federal government in order to safeguard monetary policy from political pressures.

8. Which industries or sectors does inflation tend to impact first?

Every inflationary cycle is different . Increased demand for a certain product—like the hunt for toilet paper in the first days of the COVID-19 pandemic—could lead to a spike in prices in that industry. Or, conversely, disrupted supply chains could cause inflation to increase. Think about the computer chip scarcity that is contributing to the current shortage of new cars and, in turn, sky-high car prices. Industries that tend to experience the first effects of inflation include energy, utilities, real estate, and consumer staples.

9. Which industries or sectors will take the longest to recover?

Inflation often hits companies with large inventories, such as retail stores , particularly hard. When the cost of goods increases, it usually goes up at both the wholesale and retail level. That means that stores have to replace recently sold inventory with new products that come with higher price tags from wholesalers, which eats into profits. Small businesses also often suffer during inflation, as suppliers often favor larger companies in moments of high demand. Since small businesses usually buy smaller quantities of raw materials or wholesale products, they also have less leverage with suppliers.

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10. How will inflation affect my loans?

It depends on what type of loan you have. If you’re making payments on a fixed-rate loan, inflation can actually improve your financial situation in certain circumstances. Because your interest rate on a fixed-rate loan doesn’t change with market fluctuations, the value of your loans actually decreases as inflation rises and the value of the dollar declines . However, you’ll only come out on top if your wages rise at the same rate as inflation.

Conversely, as the Federal Reserve raises interest rates to combat inflation, the interest rates on variable rate loans will also rise , increasing the amount of your monthly payments. Federal student loans, personal loans, and auto loans typically have a fixed rate. Credit cards, personal and home equity lines of credit, and private student loans often have variable interest rates. Mortgages can have either a fixed or adjustable interest rate ; check your account to see which type you have.

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Essay on Inflation: Types, Causes and Effects

Essay on Inflation!

Essay on the Meaning of Inflation:

Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously.

Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’ .

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’ . In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.

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It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level.

It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 – 193.6/193.6 × 100 = 15.6%.

As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

Essay on the Types of Inflation :

As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the contemporary society:

(a) According to Causes:

i. Currency Inflation:

This type of inflation is caused by the printing of currency notes.

ii. Credit Inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

iii. Deficit-Induced Inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called deficit-induced inflation.

iv. Demand-Pull Inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply.

If the supply of money in an economy exceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods” .

Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing too few goods.”

v. Cost-Push Inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production.

Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.

The price level thus determined is OP 1 . As aggregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

Causes of Demand-Pull Inflation :

DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.

There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries.

Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

Cost-Push Inflation Theory :

In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.

Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.

This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig. 11.4) where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection point (E 1 ) of AD 1 and AS 1 curves determines the price level.

Now, there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 .

With the reduction in output, employment in the economy declines or unemployment rises. Further shift in the AS curve to AS 2 results in higher price level (OP 3 ) and a lower volume of aggregate output (OY 3 ). Thus, CPI may arise even below the full employment (Y f ) stage.

Causes of CPI :

It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline.

In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.

Essay on the Effects of Inflation :

People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” Since inflation reduces purchasing power it is bad.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.

When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad headings:

(i) Effect on distribution of income and wealth

(ii) Effect on economic growth.

(a) Effects of Inflation on Income and Wealth Distribution :

During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently:

i. Creditors and Debtors:

Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for 7 years.

The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees.

However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.

ii. Bond and Debenture-Holders:

In an economy, there are some people who live on interest income—they suffer most.

Bondholders earn fixed interest income:

These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate.

iii. Investors:

People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.

iv. Salaried People and Wage-Earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases.

Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase.

v. Profit-Earners, Speculators and Black Marketeers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made. It is clear that someone wins and someone loses from inflation.

These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people.

With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation.

Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learns to live with inflation” , the redistributive effect of inflation will be minimal.

However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc.

Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

b. Effect on Production and Economic Growth :

Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher doses of profit.

Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.

Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here.

We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.

Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a wide imbalance in the balance of payments account.

Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources.

Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation.

The German Inflation of 1920s was also Catastrophic:

During 1922, the German price level went up 5,470 per cent, in 1923, the situation worsened; the German price level rose 1,300,000,000 times. By October of 1923, the postage of the lightest letter sent from Germany to the United States was 200,000 marks.

Butter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay double the price listed on the menu when they observed it first!!!

During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.

Anyway, people are harassed ultimately by the high rate of inflation. That is why it is said that ‘inflation is our public enemy number one’. Rising inflation rate is a sign of failure on the part of the government.

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• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on Inflation: Meaning, Measurement and Causes

What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford, Connecticut, office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far  today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

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Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

• Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage  in the supply of semiconductors  made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
• Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply  during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales  Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted  by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust  in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down  the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

• Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
• Companies lose purchasing power and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that they suppress demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT  (adjust, develop, accelerate, plan, and track) to inflation:

• Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
• Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
• Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
• Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
• Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Industrials & Electronics , Operations , Strategy & Corporate Finance , and  Growth, Marketing & Sales Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

• Design. Leaders should motivate their organizations to raise the profile of design  to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
• Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
• Procurement. CEOs who empower their procurement  organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
• Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
• Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
• Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey  expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights  collection. Learn more about Operations consulting , and check out operations-related job opportunities  if you’re interested in working at McKinsey.

Articles referenced:

• “ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
• “ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
• “ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
• “ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhart and Rosen Kotsev
• “ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm  
• “ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, Andre Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
• “ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
• “ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
• “ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
• “ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
• “ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
• “ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
• “ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
• “ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt ,  Axel Karlsson , Tarek Kasah, and  Daniel Swan
• “ Five ways to ADAPT pricing to inflation ,” February 25, 2022,  Alex Abdelnour , Eric Bykowsky, Jesse Nading,  Emily Reasor , and Ankit Sood
• “ How COVID-19 is reshaping supply chains ,” November 23, 2021,  Knut Alicke ,  Ed Barriball , and Vera Trautwein
• “ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021,  Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and  Fernando Perez
• “ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021,  Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

Want to know more about inflation?

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Home — Essay Samples — Economics — Political Economy — Inflation

Essays on Inflation

Inflation essay topics and outline examples, essay title 1: understanding inflation: causes, effects, and economic policy responses.

Thesis Statement: This essay provides a comprehensive analysis of inflation, exploring its root causes, the economic and societal effects it generates, and the various policy measures employed by governments and central banks to manage and mitigate inflationary pressures.

• Introduction
• Defining Inflation: Concept and Measurement
• Causes of Inflation: Demand-Pull, Cost-Push, and Monetary Factors
• Effects of Inflation on Individuals, Businesses, and the Economy
• Inflationary Policies: Central Bank Actions and Government Interventions
• Case Studies: Historical Inflationary Periods and Their Consequences
• Challenges in Inflation Management: Balancing Growth and Price Stability

Essay Title 2: Inflation and Its Impact on Consumer Purchasing Power: A Closer Look at the Cost of Living

Thesis Statement: This essay focuses on the effects of inflation on consumer purchasing power, analyzing how rising prices affect the cost of living, household budgets, and the strategies individuals employ to cope with inflation-induced challenges.

• Inflation's Impact on Prices: Understanding the Cost of Living Index
• Consumer Behavior and Inflation: Adjustments in Spending Patterns
• Income Inequality and Inflation: Examining Disparities in Financial Resilience
• Financial Planning Strategies: Savings, Investments, and Inflation Hedges
• Government Interventions: Indexation, Wage Controls, and Social Programs
• The Global Perspective: Inflation in Different Economies and Regions

Essay Title 3: Hyperinflation and Economic Crises: Case Studies and Lessons from History

Thesis Statement: This essay explores hyperinflation as an extreme form of inflation, examines historical case studies of hyperinflationary crises, and draws lessons on the devastating economic and social consequences that result from unchecked inflationary pressures.

• Defining Hyperinflation: Thresholds and Characteristics
• Case Study 1: Weimar Republic (Germany) and the Hyperinflation of 1923
• Case Study 2: Zimbabwe's Hyperinflationary Collapse in the Late 2000s
• Impact on Society: Currency Devaluation, Poverty, and Social Unrest
• Responses and Recovery: Stabilizing Currencies and Rebuilding Economies
• Preventative Measures: Policies to Avoid Hyperinflationary Crises

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117 Inflation Essay Topics

🏆 best essay topics on inflation, ✍️ inflation essay topics for college, 👍 good inflation research topics & essay examples, 🎓 most interesting inflation research titles, ❓ essay questions on inflation.

• The Inflation Impact on Society
• Malaysia’s Inflation
• Inflation: Causes, Problems, Impacts on Economy
• The Mechanisms of Inflation
• A Political Cartoon About Canada’s Inflation by MacKay
• Nominal Anchor: Monetary Targeting and Inflation
• Zimbabwe Inflation Now Over 1 Million Percent
• Healthcare Inflation in Canada and the US Canada spends a lower percentage of its GDP on healthcare than the United States, and its healthcare inflation rate has been consistently lower since the 1990s.
• The United States Inflation Rate Inflation is expressed primarily in the depreciation of money, which depreciates in relation to gold, commodities, and foreign currencies.
• Inflation in the UK The Bank of England raised its interest rates in response to the inflation increase and forecast inflation to reach a value just above two percent in two years.
• Options to Combat High UK Inflation Rate The development of anti-inflationary measures by the government and the Bank of England should be based on the principle of multifactoriality.
• The Impact of Government Spending on GDP Growth, Unemployment, and Inflation Real GDP Refers to every financial activity done by the government, including consumption, investment, and transfer payment.
• How Raising Interest Rates Helps Fight Inflation and High Prices There is a mutual relationship between business and government where the government regulates the environment in which business operates.
• Exploration of Price Increase and Inflation Over the Years The paper discusses how inflation affected prices in 2021 and previous periods of inflation. It helps scientists understand how important inflation is.
• The Impact of Taxation and Inflation in the U.S. Carl Szabo’s article “Democrats want you to keep paying more” from the RealClear Policy website discusses how the current government makes Americans pay more.
• Real vs. Inflationary Growth: What’s the Difference? Real growth and inflation are associated with the Gross Domestic Product (GDP). GDP is the total market worth of a nation’s products and services during a specific period.
• The Ethical Repercussions Inflation Has Had on Businesses This paper analyzes the ethical repercussions inflation has had on businesses and the impacts that inflation has had on consumers and other businesses.
• The Unemployment and Inflation Causes in Australia The change in the Australian 2021 indicator of unemployment is the representation of cyclical unemployment since it lasted less than a year.
• Grades Inflation and Educational Services Quality In the modern education system, the quality of educational services has become the most relevant topic. The rating system aims to improve the differentia of academic performance.
• Inflation, Oil Prices, and How the President May Influence Them Inflation and oil prices are actual modern themes, as they are directly connected with the incomes and wealth of most people.
• How to Cure Inflation: Summary Inflation leads to increased prices. Although wages grow, the taxes increase. In the end, people do not have more money to spend on goods.
• Inflation and Increase in Money Supply Even though the increase in the money supply might stimulate the economy, it is a dangerous strategy, and the Federal Reserve has to act with caution.
• Inflation and Consumer Price Indexes The paper provides an example of a country that has implemented hyperinflation and explains the impact of this economic policy on the economy.
• The US Federal Reserve on Employment and Inflation The paper analyzes the statement of Federal Reserve, how it affects the economy, why the general public criticizes it, and what the future looks like if strategic changes are made.
• Federal Reserve System, Inflation, and Wage-Price Spiral An important indicator that can cause a policy shift toward a more stringent monetary policy would be the wage-price spiral.
• Inflation and Control Policies in the United Kingdom Inflation is a highly contentious issue. This is due to its economic implications. Inflation has the potential of crippling a country’s economy.
• The Problem of Inflation: Crucial Aspects Of primary importance is the recognition that inflation is not an unnatural or harmful mechanism for a country’s economy.
• Measuring Inflation: Article Analysis Fluctuating in a seemingly unpredictable way, inflation rates are shaped by a range of factors, one of which is the change in the cost of living.
• Measuring Inflation: Consumer Price Index The article examines the consumer price index as the main instrument for measuring inflation in the United States, analyzes its advantages and disadvantages.
• Inflation and Unemployment in Bavaria Considering the normal state of the economy and the existing level of employment close to full, the President of Bavaria is not recommended to pursue an expansionary fiscal policy.
• Inflation in the Real Estate Industry This paper will cover the real estate industry in the US, as it might be affected by the increased inflation rates, as the demand for housing is not increasing as quickly.
• Balance of Payments, Inflation and Exchange Rate Balance of payments, inflation, and the exchange rate are the main driving forces of the UK economy, as well as in other countries.
• Inflation in India and China The growth of the Asian economies, more specifically China and India have allowed the examination of inflation in both countries.
• China Faces Inflation Pressure Inflation is essentially the rise in general price of goods and services over a period of time in economics. It is more commonly referred to as price inflation in now.
• Income Inflation: Absorption Costing vs. Variable This paper presents a summary of and a reaction to the article, Income Inflation: Absorption Costing vs. Variable by Wink and Corradino.
• Inflation in the United Kingdom’s Economy Global Positioning System is a system comprised of satellites capable of broadcasting certain signals used primarily for navigation in both the private and the military sectors.
• Mugabenomics as a Cause of Inflation in Zimbabwe The paper outlines the primary challenges of Zimbabwe economic system and provides a consistent account of inefficient economic strategies that disrupt the country’s well-being.
• Today’s Inflation and the Great Inflation of the 1970s
• Accelerating Inflation and the Distribution of Household Savings Incentives
• Perceived Inflation and Reality: Understanding the Difference
• Alternative Instruments for Hedging Inflation Risk in the Banking Industry
• Making Sense of Consumers’ Inflation Perceptions and Expectations
• Evaluating Inflation Targeting Based on the Distribution of Inflation and Inflation Volatility
• Global Inflation Dynamics: Regularities and Forecasts
• Contract Duration, Inflation Uncertainty, and the Welfare Effects of Inflation
• Advanced Economy Inflation: The Role of Global Factors
• Central Banks’ Inflation Forecasts: The Problem of Conditioning on Fixed Short-Term Interest Rates
• Who Is Suffering the Most From Rising Inflation?
• Conflict Inflation: Estimating the Contributions to Wage Inflation in Australia During the 1990s
• Adaptive Models and Heavy Tails With an Application to Inflation Forecasting
• The Main Strategies to Deal With Inflation in Business
• Does Inflation Harm Economic Growth?
• High Inflation and the Nominal Anchors of an Open Economy
• Euro Area Inflation: Aggregation Bias and Convergence
• Adopting Inflation Targeting: Practical Issues for Emerging Market Countries
• Causality Nexus Between Economic Growth, Inflation, and Innovation
• Analyzing Inflation: Monetary and Real Theories
• Deflating Inflation Expectations: The Implications of Inflation’s Simple Dynamics
• Forecasting Inflation: The Relevance of Higher Moments
• Inflation and Financial Market Performance: What Have We Learned in the Last Ten Years
• Commodity Prices and Inflation in the Middle East, North Africa, and Central Asia
• Analyzing the Connection Between Inflation and Unemployment
• Administered Prices, Inflation, and the Business Cycle
• Core Inflation and Inflation Targeting in a Developing Economy
• Baffling Inflation: Cost-push Inflation Theories in the Late 1950s United States
• America’s Historical Experience With Low Inflation
• Right Balance Between Growth and Inflation
• Admissible Monetary Aggregates and UK Inflation Targeting
• Estimating the Optimal Inflation Target From Trends in Relative Prices
• Causality Between Inflation and Inflation Uncertainty in South Africa
• Analyzing Factors Affecting U.S. Food Price Inflation
• Forecasting Inflation Using Economic Indicators: The Case of France
• Central Bank Independence and Inflation: Good News and Bad News
• Deflation and Inflation Trends in Japan
• Anticipated Inflation and Interest Rates in an Open Economy
• Financial Conditions and Density Forecasts for US Output and Inflation
• Arch and Structural Breaks in United States Inflation
• Has U.S. Inflation Really Become Harder to Forecast?
• Challenges for Adopting Inflation Targeting Regime in Egypt
• Demographic Transition and Inflation in Emerging Economies
• High Inflation: Resource Misallocations and Growth Effects
• Australian Wage and Price Inflation: 1971-1994
• Consumer Attitudes and the Epidemiology of Inflation Expectations
• Food Inflation and the Consumption Patterns of U.S. Households
• Inflation and Asset Returns in a Monetary Economy
• Discovering the Link Between Inflation Rates and Inflation Uncertainty
• Inflation and Deflationary Biases in Inflation Expectations
• What Are the Reasons for High and Persistent Inflation in the Country?
• How Does Inflation Affect Savings and Investment?
• How Is Inflation Used as a Measure of Economic Performance?
• What Is the Monetarist View of Inflation?
• Does Inflation Lead to a Rapid Increase in Unemployment?
• Whom Does Inflation Hurt the Most?
• What Measures of Inflation Are Used Today?
• Why Does Increased Interest Rate Not Increase Inflation?
• Why Does an Increase in the “Cost of Money” Not Mean an Increase in Inflation?
• What Methods Are Used to Control Inflation?
• What Happens to the Equilibrium Interest Rate When Inflation Is Expected to Decrease?
• Why Are Economists Concerned About Inflation?
• How Can Government Policies Be Used to Reduce Inflation in a Country?
• What Is Natural Rate of Inflation?
• How Can Cost-Push and Demand-Pull Inflation Be Caused by a Fall in the Exchange Rate?
• What Is the Condition of Low and Stable Inflation Called?
• How Does Inflation Affect Cash Flows?
• In Which Decade Was the Highest Rate of Inflation in the United States?
• Does Inflation Always Benefit Debtors and Hurt Creditors?
• Can the Introduction of a New Banknote Cause Inflation?
• How Does the Government Directly and Indirectly Create Inflation?
• What Are the Macroeconomic Effects of Inflation?
• How Does Unexpected Inflation Affect Creditors, Debtors, and Savers?
• Can Inflation Occur With Non-fiat Money?
• What Is the Effect of Inflation on Our Financial Assets?
• Why Does Inflation Harmful to the Economy?
• Could Inflation Be a Problem for Some Low- And Middle-Income Countries?
• What Does the Phillips Curve Show During Inflation?
• How Can an Inflation Tax Explain the Creation of Inflation by a Central Bank?
• What Type of Inflation Will Cause Stagflation?

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These essay examples and topics on Inflation were carefully selected by the StudyCorgi editorial team. They meet our highest standards in terms of grammar, punctuation, style, and fact accuracy. Please ensure you properly reference the materials if you’re using them to write your assignment.

This essay topic collection was updated on June 23, 2024 .

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Essay Samples on Inflation

How to reduce inflation: the role of monetary policy and measures.

Inflation, the persistent rise in the general price level, poses challenges for individuals, businesses, and economies as a whole. Controlling and reducing inflation is a crucial objective for policymakers seeking to maintain stable economic conditions. There are several ways how to reduce inflation and this...

• Monetary Policy

Unraveling Theories of Inflation in Economics and Its Problem Nature

Inflation is the continual rise in prices, this is also known as a monetary problem. There are different monetary policies in order to keep inflation below a certain level one of these consist of inflation targeting which allows banks to keep a good stability on...

• Economic Problem

How to Reduce Unemployment: What the Government Can Do for People

Unemployment is defined as 'People willing and able to work at the current rate of pay but who are unable to find a job'. There are a number of types of unemployment, including structural, cyclical, seasonal and frictional unemployment. Unemployment is a key measure of...

• Unemployment

Teachers And Professional Athletes Are Paid Differently: Teachers Should Be Paid More

Is it fair that Teachers and Professional Athletes are paid differently? I think the real question should be if they can even be categorized the same. I don't believe the wages of the two can even compare, simply because who is to say one is...

The Political Stance on Raising the Minimum Wage

The lowest wage permitted by law or by a special agreement is a country’s Minimum wage [1]. With a population of 7.6 billion people in the world of whom 2.5 billion live on less than $2 a day [2]. The cost of water in the...

• Minimum Wage

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Minimum Wage: The Slow Increase and Development History

Politicians had been advocating for minimum salary growth often over the previous couple of years and elections. Most Democrats argue for growth at the same time as Republicans generally oppose it. Democrats say we want a boom in the minimal salary to raise human beings...

The Effects of Inflation on a Financial Situation of People

Have you ever thought about how inflation can affect us in a financial sense? This paper will go in-depth and explain the causes of inflation and how it affects consumer behavior, income, investment, and business. In this paper we will go over the methods on...

• Financial Crisis

Understanding Inflation'S Dangers To Philippine Economy

Throughout the most parts of the world, consistent efforts are placed to reduce skyrocketing inflation rates to fall on targeted bands of an economy. Motivated by the convention that inflation bring harmful effects. In the Philippines’ inflation rate soared up to 6.7% for months September...

• Philippines

How Does Inflation Affect the Imbalance of Payments

Inflation rate is a significant variable in economy and affected nation’s balance of payments. It is determined as a stable increase in the overall price level of goods and services in the economy. According to Quah and Vahey (1995), inflation rate is general increase in...

• World Economy

Perception Of Ofw Children On The Inflation In Saudi Arabia

Introduction ​The economy is a man-made organization with the purpose of satisfying human wants by using limited or scarce resources available and known to a society (Aggarwal & Devi, 2002). It encompasses all of the activities involved in the production and distribution of goods and...

• Saudi Arabia

Effect Of Rupee Depreciation On Indian Economy

Lower value of Currency leads to rattle the economic growth of every small scale to large scale business affecting the population adversely. The terms Inflation, Price Hike, Imports, and taxes can’t remain untouched with the inclusion of Currency Depreciation for any country. Ultimately the financial...

Best topics on Inflation

1. How to Reduce Inflation: the Role of Monetary Policy and Measures

2. Unraveling Theories of Inflation in Economics and Its Problem Nature

3. How to Reduce Unemployment: What the Government Can Do for People

4. Teachers And Professional Athletes Are Paid Differently: Teachers Should Be Paid More

5. The Political Stance on Raising the Minimum Wage

6. Minimum Wage: The Slow Increase and Development History

7. The Effects of Inflation on a Financial Situation of People

8. Understanding Inflation’S Dangers To Philippine Economy

9. How Does Inflation Affect the Imbalance of Payments

10. Perception Of Ofw Children On The Inflation In Saudi Arabia

11. Effect Of Rupee Depreciation On Indian Economy

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Essay on Inflation

Students are often asked to write an essay on Inflation in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Inflation

Understanding inflation.

Inflation is when prices of goods and services rise over time. This means you need more money to buy the same things. It’s like a slow-motion robbery!

Causes of Inflation

Inflation is often due to increased production costs or increased demand for goods and services. When people want more of something, and it’s scarce, prices go up.

Impact of Inflation

Inflation affects everyone. If your income doesn’t increase as fast as inflation, you’ll have less buying power. But, if you’re a business owner, you might be able to raise prices and make more money.

Controlling Inflation

Governments try to control inflation by adjusting interest rates, taxes, and government spending. It’s a tricky balancing act to keep inflation low but not too low.

250 Words Essay on Inflation

Inflation, a crucial economic concept, refers to the rate at which the general level of prices for goods and services is rising, subsequently eroding purchasing power. It’s an indicator of the economic health of a nation, with moderate inflation signifying a growing economy.

The Causes of Inflation

Inflation generally occurs due to two primary factors: demand-pull and cost-push inflation. Demand-pull inflation transpires when demand for goods and services surpasses their supply. On the other hand, cost-push inflation arises when the costs of production escalate, causing producers to increase prices to maintain profit margins.

Effects of Inflation

Inflation impacts various aspects of the economy. It erodes the purchasing power of money, causing consumers to spend more for the same goods or services. Inflation can also create uncertainty in the economy, affecting investment and saving decisions. However, moderate inflation can stimulate spending and investment, driving economic growth.

Managing Inflation

Central banks attempt to control inflation through monetary policy. By adjusting interest rates, they influence the level of spending and investment in the economy. Higher interest rates typically reduce spending, curbing inflation. Conversely, lower interest rates stimulate spending, potentially leading to inflation.

Inflation is a complex and multifaceted subject. Understanding its causes, effects, and the measures to control it is essential for both macroeconomic stability and individual financial well-being. As future leaders, it’s crucial for us as students to grasp these concepts to make informed decisions in our professional and personal lives.

500 Words Essay on Inflation

Introduction to inflation.

Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since the end of the gold standard, governments have had the ability to create money at will. If a nation’s money supply grows too rapidly compared to its production of goods and services, prices will increase, leading to inflation.

Additionally, inflation can be spurred by demand-pull conditions, where demand for goods and services exceeds their supply. Cost-push inflation, on the other hand, occurs when the costs of production increase, causing producers to raise prices to maintain their profit margins.

Impacts of Inflation

Moreover, inflation can harm savers if the inflation rate surpasses the interest rate on their savings. It also favors borrowers, as the real value of their debt diminishes over time. This redistribution of wealth from savers to borrowers can lead to social and economic inequalities.

Central banks use monetary policy to control inflation. They adjust the money supply by setting interest rates and through open market operations. By raising interest rates, central banks can decrease the money supply, making borrowing more expensive and slowing economic activity, thereby reducing inflation.

Inflation is an intricate part of our economic systems. It is a double-edged sword that can stimulate economic growth when mild, but can also lead to economic instability when it becomes too high. Understanding inflation is crucial for policymakers, investors, and consumers alike as it influences our decisions and shapes our economic reality. By effectively managing inflation, governments can promote economic stability and growth, thereby improving the standard of living for their citizens.

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Expert Answers to Readers’ Questions About Inflation

The New York Times asked readers to send questions about inflation. Economists at the Federal Reserve, the White House and Wall Street weighed in.

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By Jeanna Smialek

Inflation is high and has been for months. It’s weighing on consumer confidence, making policymakers nervous and threatening to eat away at household paychecks well into 2022.

This is the first time many adults have experienced meaningful inflation: Price gains had been largely quiescent since the late 1980s. When the Consumer Price Index climbed 7 percent in the year through December, it was the fastest pace since 1982.

Naturally, people have questions about what this will mean for their pocketbooks, their finances and their economic futures.

Closely intertwined with price worries are concerns about interest rates: The Federal Reserve is poised to raise borrowing costs to try to slow down demand and keep the situation under control.

To bring some clarity to a complicated situation, we collected more than 600 reader questions, narrowed them down to a handful that reflected common themes, and asked top economists and experts — from the White House, the Federal Reserve, Wall Street, academia and financial advisory firms — to weigh in. Here is what they had to say.

Readers want to know what caused inflation, and what might come next.

What would cause prices to keep increasing versus staying at their current level? Why wouldn’t competition keep prices in check? — Nick Altmann, Chicago

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You Decide: Are There Good Answers to Your Inflation Questions?

By Mike Walden

According to polls, inflation is the number one issue in the country. This is understandable. The most recent data show the inflation rate during the past year was 7.5%. In the 21 st century, the annual inflation rate was above 3% only four times, and it never rose more than 4% until last year.   

In this column, I will answer several questions about inflation. Hopefully my answers will help you understand what inflation is, how it impacts you, and what can be done to moderate inflation’s impacts.

What is inflation?

Inflation is the average increase in the prices of common products and services we purchase. Price changes of products and services that are more important to our budgets receive greater weight on the average. Inflation is usually expressed as an annual percentage. So, a 7.5% inflation rate means the average weighted price of products and services rose 7.5% over the year.

Why are we concerned about inflation?

Inflation increases the cost of living. If your income rises less than the inflation rate, then your standard of living falls. Hence, if your income rose less than 7.5% in the last year, then economically, you fell behind.

When was the last time the inflation rate was as high as today?

In 1981, the inflation rate was 10.3%. In 1980, it was 13.5%.

Are there other countries experiencing a high inflation rate today?

Yes, several countries are enduring higher inflation rates, such as Germany and the UK at near 6%, Mexico at 7%, and Russia at almost 9%. But, at least we’re lower than Cuba’s 77% inflation rate and Venezuela’s recent 472% inflation rate.

What’s caused the jump in the inflation rate?

There are two reasons. First is continuing problems with the “supply chain.” This simply means it’s taking longer to get many products to sellers’ shelves. Also, the on-going shortage of workers is adversely impacting the availability of some services. Lower supply of many products and services means those that are available are worth more, which results in their prices being higher.

The second reason has resulted from the generous federal stimulus programs during the past two years. In 2020 and 2021, the federal government appropriated over $5 trillion in a variety of programs to help households, businesses and institutions survive in the pandemic. The result is that there is money to spend. As consumers attempt to spend the money on a limited amount of products and services, their actions put further upward pressure on prices.

Can’t the government simply control price changes?

Forty years ago, price controls were imposed by the federal government to deal with a similar inflation situation. There were two problems that emerged as a result. Changes in prices serve as signals to tell firms how to adjust production to eliminate both surpluses and shortages. Controls on prices eliminate this important function. Also, some firms used schemes and even fraud to get around the controls. When the price controls were removed, the inflation rate tripled.

Some argue increased government spending would decrease the inflation rate. Is this true? 

Government spending that increases the supply of products and services, encourages more people to work, and makes workers more productive would moderate price increases.  However, many of these programs take time to work, so the effect on inflation is not immediate.  A good example is educational and training efforts designed to improve the productivity of current and future workers.

Then what can the government do to curtail inflation?

The government agency that can have the quickest impact is the Federal Reserve (the “Fed”), which is the central bank of the country. To reduce the inflation rate, the Fed will want to moderate consumer spending. The Fed will do this by raising interest rates – thereby making it more expensive for people to borrow and spend – as well as by pulling cash out of the economy.

Are these actions by the Fed guaranteed to work?

The Fed certainly has the tools to slow the economy and reduce the inflation rate. The problem is their actions can put the economy in reverse – meaning a recession. This is what happened forty years ago when the inflation rate was in double digits. The Fed was able to reduce the inflation rate from 13% to 3% within three years, but the cost was two recessions in those three years.

How will these actions impact investments?

Typically, the stock market reacts negatively to increases in interest rates. An exception is if equity investors expect the interest rate hikes will quickly subdue inflation. However, if stock market investors expect the Fed’s actions will bring on a recession, stock prices would likely fall.  

Inflation hasn’t been a big worry in the economy for four decades, so many individuals are witnessing the debates about inflation for the first time. Hopefully my questions and answers will help you decide how to respond to the ongoing inflation battle.

Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University. 

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Macro Economic Essays

These are a collection of essays written for my economic blogs.

Exchange Rate Essays

• Effects of a falling Dollar
• Why Dollar keeps falling
• Discuss Policies to Stop the Dollar Falling
• Does Devaluation Cause Inflation?
• Benefits and Costs of Falling Dollar
• Reasons for Falling Dollar
• The Dollar as the World’s Reserve Currency

Economic Growth Essays

• Evaluate Benefits of Economic Growth
• Essays on Recessions
• Causes of Recessions
• Problems of Recovering from a Recession
• What can Increase Long-Run Economic Growth?
• Discuss Effect of a fall in the Savings Ratio

Inflation Essays

• Discuss the Difficulties of Controlling Inflation
• Should the aim of the Government be to Attain Low Inflation?
• Explain What Can Cause a Sustained Increase in the Rate of Inflation
• Reasons for low inflation in the UK
• Inflation Explained
• Difficulties of Inflation targeting
• Hyperinflation

Unemployment Essays

• Explain what is meant by Natural Rate of Unemployment?
• Should the Main Macro Economic Aim of the Government be Full Employment?
• The True Level of Unemployment in the UK
• What explains low inflation and low unemployment in the UK?

Demand Side Policies

• Discuss effect of Expansionary demand-side policies on Balance of Payments and Environment
• Effects of a Falling Stock Market
• How do Mortgage Defaults affect and Economy?
• Discuss the effect of increased Government spending on education
• Phillips Curve – Trade-off between Inflation and Unemployment

Development Economics

• Why Growth may not benefit developing countries
• Does Aid Increase Economic Welfare?
• Problems of Free Trade for Developing Economies

Fiscal Policy

• Will US Economy benefit from Tax Cuts?
• Can Fiscal Policy solve Unemployment?
• Explain Reasons for UK Current Account Deficit
• Benefits of Globalisation for Developing and Developed Countries

Monetary Policy

• Discuss Effects of an Increase in Interest Rates
• How MPC set Interest Rates
• Benefits of High-Interest Rates (and recessions)
• Who Sets interest rates – Markets or Bank of England?

Economic History

• Economics of the 1920s
• What Caused Wall Street Crash of 1929?
• UK economy under Mrs Thatcher
• Economy of the 1970s
• Lawson Boom of the 1980s
• UK recession of 1991
• The great recession 2008-13

General Economic Essays

• The Dismal Science
• Difference Between Economists and Non Economists
• War and Recessions
• The Economics of Fear
• The Economics of Happiness
• Can UK and US avoid Recession?
• 3 Of the Worst Economic Policies
• Overvalued Housing Markets
• What Went Wrong with US Economy?
• Problem with Bailing out financial sector
• Problems of Personal Debt
• Problem of Inflation
• National Debt in the UK
• How To Survive a Recession
• Can A recession be a good thing?

Chinese Economy

• Problems of Chinese Economic Growth
• Should we worry about a strong China
• Chinese Growth and Costs of Growth
• Chinese Interest Rates and Economic Growth

Model essays

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• Top 10 Reasons For Studying Economics
• Inflation explained by Victor Borge
• Funny Exam Answers
• Humorous look at Subprime crisis

Essays on Inflation

Increasing Inflation Impact on Individuals Essay

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Inflation refers to a general increase in the prices of basic commodities and services, usually taken to represent an average spending pattern (Mankiw, 2012). In simpler terms, inflation is the rise in the cost of living due to an exaggerated increase in commodity prices. As inflation sets in, both individuals, corporations, and the government usually feels its impacts. However, a significant increase in the level of inflation will cause numerous impacts on me as an individual.

Since inflation means a rise in prices of common and basic goods, my purchasing power will reduce since the income shall remain constant as prices rise up (Sexton, 2007). This is because the rate of inflation affects the currency’s purchasing power. As inflation rises, the value of the currency reduces proportionately or even at a higher rate pattern (Mankiw, 2012). Generally, the prevailing rate of inflation dictates the number of goods that I will be able to afford. As the cost of basic such as fuel prices, its trickle-down effects are manifold. The energy prices will increase the prices of foodstuffs such as grains since the machinery costs used in production shall have increased.

Because of a rise in the cost of living, it will lead to lower standards of living since inflation negatively influences the comfort of life. To demonstrate this impact, clearly, there shall be a shift from spending on leisure activities toward basic commodities.

Inflation influences budgeting and planning for investment. Ordinarily, inflation is a phenomenon that happens without the prior and perfect knowledge of an individual, and as such, planned budgets are affected. The confusion created by an uncertain increase in both costs and prices eventually hampers the planning process (Sexton, 2007). Similarly, the amount planned for investment will reduce hence causing a detriment in my overall investment base.

Inflation causes money to lose its value due to a rise in the price level. Since I am a regular saver, the rising inflation will affect me in the sense that I will lose confidence in the currency as a measure of value. This is because the rate of savings will be lower than the inflation resulting in a negative real interest rate on savings (Madura, 2006). For instance, if the per year inflation rate is at 6% while the nominal rate on savings is 3%, it means that the real interest rate on my savings is -3%.

The other effect of inflation will be tendencies of food shortages on the market occasioned by hoarding by sellers. Market analysis shows that an anticipated increase in inflation stimulates hoarding since sellers withhold goods with a view to selling at a higher price. Sellers will begin to cause physical scarcity of food and other products on the market since they would be anticipating better prices in the future (Sexton, 2007). As an individual, it will become difficult to access basic items, and if available, their prices will be excessively farther than what I can afford.

However, I will also be able to benefit from the government intervention plans and policy adjustments geared towards addressing inflation (Madura, 2006). The government’s policy to amend the nominal rates in order to cushion the savers will automatically be advantageous to me. As such, I will be motivated to increase my savings and investment in order to meet my future investment objectives.

Madura, J. (2006). Introduction to business . New York, NY: Cengage Learning.

Mankiw, N.G. (2012). Principles of macroeconomics (6 th .). Mason, OH: South-Western, Cengage Learning.

Sexton, R. L. (2007). Exploring Economics . New York, NY: Cengage Learning.

• Inflation and Deflation and Their Outcomes
• Consumer Price Indices for Gasoline and Electricity in Canada
• Nominal versus Real Gross Domestic Product
• Nominal and Real GDP Growth Rates
• Economic Issues: Real and Nominal Variables
• Maintenance of Stable Pricing
• Inflation Expectations: Households and Forecasters
• United Arab Emirates and Norway Economies
• Fall in Oil Prices in the mid 2014
• Inflation in the 1970s
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Everything you always wanted to know about inflation (but were afraid to ask)

While inflation has been easing, Americans are still feeling its lingering effects at the grocery store. Spencer Platt/Getty Images North America hide caption

Americans have lived under the grip of inflation since the COVID-19 pandemic hit the world in 2020 — and for many people, it's still a confusing time.

As part of a series looking at how Americans are dealing with inflation, NPR asked listeners and readers to share some of the main questions they still have about inflation.

Many answered, wondering about aspects of inflation that still don't make sense to them, like whether corporations are engaging in profit-taking or whether election years impact inflation.

Here's a compilation of the top six questions asked — along with their answers.

Are companies just using inflation as an excuse to increase their profits?

It's complicated. Companies have faced the same higher costs like the rest of us — and many of them have passed on those costs to consumers.

At the same time, some companies have also been able to use higher inflation as an opportunity to raise prices beyond what simple cost increases would explain. That's not a surprise. Companies exist to maximize profits, and they'll usually charge what they feel the market can bear.

"Corporate executives can take advantage of inflation," says Rakeen Mabud, chief economist at Groundwork Collaborative. "They can take advantage of things like supply chain issues to jack up prices above and beyond what their input costs would justify."

Inflation fell to its lowest level in more than three years in July

But there's some good news. Those "input costs" — or the costs related to producing something — are easing, which means companies no longer need to increase their prices as much.

At the same time, consumers are pushing back against aggressive pricing strategies, so companies are starting to back down. McDonald's, for example, brought back a $5 value meal following its first sales decline since the pandemic began.

How do high interest rates slow inflation?

High interest rates help combat inflation by raising the cost of borrowing money, which can then slow economic activity — and therefore consumer spending.

For example, somebody who has to pay more for a car loan or for their mortgage may have less to spend elsewhere.

And to combat inflation, the Federal Reserve has raised interest rates to their highest in over two decades.

Those higher rates have helped bring down inflation, which eased to an annual pace of 2.9% last month.

It's not just high interest rates helping to ease inflation. A big reason that inflation spiked during the pandemic was companies were not well prepared to meet the surge in demand for everything from iPhones to laptops from consumers stuck at home.

But companies have since responded to the shortages of goods seen during the pandemic by investing in supply chains.

"When we get new technology, better processes, better equipment, that can help reduce the cost of producing various goods and services, and that can be passed on to the consumer," says Sarah House, a senior economist at Wells Fargo.

Why is there a 2% target inflation rate — shouldn't it be 0%?

Setting a target inflation rate is seen as helping to ensure more stability in prices by giving a clear objective for the central bank.

New Zealand was the first country to set 2% as a target rate , in 1989, and most central banks followed suit, including the Fed, which made the target explicit in 2012.

While a 0% inflation rate may sound ideal in theory, economic growth requires some form of inflation.

Setting the target at 0% also raises the risk that the Fed could overshoot its objective, putting inflation at a negative rate, or deflation.

That's when prices fall, which may sound like a good thing, but it can be economically very harmful. Widespread price cuts are typically a symptom of economic distress.

How have election seasons impacted inflation?

In short, not by much.

Plus, economists note, each election year is different, so comparing them is rarely an apples-to-apples comparison.

The Fed has also usually fiercely guarded its independence in setting monetary policy — regardless of whether there's an election taking place.

Sometimes, though, an election can slow spending by both corporations and consumers, which can help ease inflation.

"Businesses and people are very unsure about who's going to win and what the future holds, so they decide to sort of pull back a little bit — you know, maybe not make that big expenditure, maybe not hire that new employee or make that investment until they know," says Julia Coronado, president of MacroPolicy Perspectives.

Why is it taking so long for inflation to ease?

This is where regular people and economists might see things differently.

"Inflation is coming down really fast by economist standards, and I know that's not the average person's standards," Coronado says.

Many people still feel they are paying more at the supermarket or at restaurants than they used to — and they are not incorrect.

Labor Department report shows inflation easing a bit more than expected

Inflation during the pandemic rose more than many Americans had grown used to in years prior, and all the cumulative price increases continue to hit people's wallets.

But annual inflation is easing, from an over four-decade high of 9.1% in June 2022 to 2.9% in July of this year.

But that only means prices are no longer increasing as much. It doesn't mean that prices are falling, which is deflation. And as noted, that is not usually a good thing for the economy.

Is the only solution to inflation to go through a recession?

Thankfully, no — but a recession can occur.

The difficulty with monetary policy is that the impact of interest rate changes doesn't have an immediate effect: There's usually a delay in how they filter through the economy.

That makes deciding how much to raise interest rates — as well as how long to keep them high — a difficult exercise.

Economists had worried last year that the economy would be headed for a recession. Instead, the economy grew strongly .

But recent weaker-than-expected data on employment has raised concern that the Fed has kept interest rates too high and that the economy could be slowing sharply.

There are no guarantees that a recession is coming — most economists still don't expect one.

And while the Fed has kept interest rates steady since July 2023, many expect it to cut rates next month, by either a quarter percentage point or even more.

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Questions and Answers About Inflation

Authors: Norbert Michel and William Beach

Select a Section 1 /0

The Federal Reserve has announced that it will raise its target interest rate to 1.25 percent to stave off inflation. The following provides a basic guide to inflation-what it is, how it works, and how the Fed tries to manage it.

Q: What is inflation?

A: A basic definition of inflation is that inflation is a rise in the general price level throughout the economy. This general price level is commonly measured by the Consumer Price Index.

Q: What causes inflation?

A: There's no easy answer here. Think of a business that has more customers than it can handle and, therefore, is doing quite well. The owners of this business are likely to raise the prices they charge their customers. In this way, economic activity can, in general, lead to a temporary rise in the level of prices. Such a rise is temporary because high prices attract other firms to compete with the business owner. Also, every business owner's interest in high profits puts an emphasis on increasing productivity, and that can put downward pressure on prices.

Often, when economists talk about inflation, they are referring to a sustained rise in prices that is "too high" or "too fast." Although economists may not agree on precise definitions for these terms, they describe the basic problem: too many dollars chasing too few goods.

Q: What does "too many dollars chasing too few goods" mean?

A: Imagine if all the banks in the United States simultaneously placed an extra $500,000 in every bank account. Most people would probably rush out to spend a good bit of this money. Let's say most of them decided to buy a new car. Unfortunately, carmakers would not have enough cars to satisfy everyone. The likely response by carmakers would be to raise their prices. In other words, too many dollars (people with "extra" money) chasing too few goods (cars).

Q: How would we end up with too many dollars in the economy?

A: Essentially, the Federal Reserve serves as the monetary authority in the United States and controls the amount (or supply) of money in the economy. If the Fed miscues, for instance, we could easily end up with too much money in the economy.

Q: How does the Federal Reserve control the amount of money in the economy?

A: The term "control" has to be qualified. For example, if the Fed wants to increase the supply of money, it can simply have more money printed (at the U.S. Mint). But that's unlikely because it would be the best way to make sure too many dollars are chasing too few goods.

Instead, the Fed tries to influence the amount of money through interest rates. Currently, the Fed "targets" the short-term interest rate called the federal funds rate. The idea is this: if the Fed can keep interest rates low, there will be more money in the economy, and if the Fed can send interest rates higher, there will be less money in the economy. This policy is supposed to work through bank lending. Banks will lend more money when interest rates are low (because the price of credit is lower) and less money when they are high (because the price of credit is higher).

Q: How does the Federal Reserve influence the federal funds rate?

A: The Fed employs a group of bond traders to buy and sell bonds on its behalf. If the Fed wants to increase the amount of money in the economy, it directs its traders to buy bonds. This money will end up in banks that, in order to profit, will lend the new money. If the banks want to lend the new money, then they will have to lower the price of credit-interest rates. The process is supposed to work in reverse, too; when the Fed wants to decrease the amount of money in the economy, it sells bonds, thus taking money out of the economy.

Q: Ideally, what should be the goal of the Federal Reserve's monetary policy?

A: The Federal Reserve's monetary policy should support a growing economy but should not adversely affect the general level of prices. Put another way, the Federal Reserve should constantly strive to maintain an amount of money and credit that meet the economy's need for cash and credit, but at levels that do not cause inflation.

Q: What influence do foreign oil producers have on U.S. inflation ?

A: The inflation rate can respond quickly to changes in the price of materials that are widely used in the economy. Because American consumers use a great volume of petroleum-derived goods, oil qualifies as such a material.

The production policies of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers that follow OPEC's lead can significantly affect overall prices in the short-term. Many people remember how much inflation rose during the oil boycott of the early 1970s, when the CPI hit double-digit levels several times. OPEC production policies, however, have short-term effects because high oil prices stimulate domestic production of oil and oil substitutes. Thus, the economic "shock" from high oil prices that Americans feel through higher prices for transportation, food, manufactured household products, and other goods dependent on energy from oil ultimately fades away as new sources of energy come onto to the U.S. energy market.

Q: Does the strength of the dollar in foreign money markets affect the inflation rate?

A: There is a two-way relationship between exchange rates and inflation. When U.S. consumers buy foreign products they pay prices that reflect the exchange rate of the dollar against the currency of the country that produced the product. For example, if the importer of German beer to the United States must pay more dollars for the same amount of beer he usually buys, then U.S. consumers will in turn pay more dollars to the importer when they buy the beer at their grocery store. Thus, the exchange rate between Germany and the United States can impact inflation in the United States. Of course, inflation in either country could also impact the exchange rate between the two countries.

Q: How can we measure inflation?

A: There are several ways to measure inflation, but the most commonly recognized is the Consumer Price Index (CPI).

Q: What exactly is the CPI?

A: The CPI is a measure of what it costs to buy a bundle of goods today compared to what that bundle of goods cost in the past. The Bureau of Labor Statistics (BLS) conducts a survey (called the Consumer Expenditure Survey) that collects data on how much people pay for various goods and services. The BLS then uses this information to develop the cost of a "typical" bundle of goods. The actual index is calculated by dividing the price of the bundle in a given year by the price of the bundle in the base year (the starting point) and then multiplying by 100. The resulting number is the CPI.

Although we frequently hear about "the CPI," the BLS actually computes more than one CPI, but the most used is the CPI-U, which measures prices for urban consumers.

Q: How do I use the CPI?

A: It's quite easy to use the CPI. Let's measure the rate of inflation (how fast prices rose) from 2001 to 2002. The annual CPI for 2001 is 177.1, and the annual CPI for 2002 is 179.9. Just calculate the percentage change between the two index values ((179.9 - 177.1) / 177.1 )*100), and you'll see that prices rose 1.6 percent from 2001 to 2002.

Another way of thinking about the inflation rate is to ask how much will a dollar buy now versus what a dollar would have bought before? In our example, $1.00 in 2001 had the same value as $1.06 in 2002. In terms of what you can buy with one dollar, you are worse off in 2002: to buy what cost $1.00 in 2001, you needed $1.06 in 2002.

This relationship is easier to see if we use a longer time period. One dollar of goods in 1980 would cost $2.29 in 2004. You can calculate this measure for any two years with the BLS inflation calculator .

Norbert Michel, Ph.D., is Policy Analyst in, and William W. Beach is Director of, the Center for Data Analysis at The Heritage Foundation.

Former Director, Center for Data Analysis

Senior Associate Fellow

Monetary Policy

Monetary policy is critical, because the wrong money supply can severely alter the economy even if the fiscal (tax and spending) policies are ideally suited to economic growth.

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Questions on inflation

• What is meant by a price index?
• Explain the difference between inflation, disinflation and deflation?
• What is meant by a weight (when used to create an index)?
• How are weights determined?
• Why do weights change over time?
• How many items are in the UK's CPI basket? Compare this with another country.
• How many prices are collected? How often?
• Why does the content of the basket change over time?
• Can you give a recent example?
• In the UK, what are the main differences between the CPI and the RPI in terms of content and calculation?
• What are the differences between CPI and CPIJ?
• Why will a one-off shock have no impact on the current rate of inflation after 12 months?
• Calculate a simple price index using weights and index numbers for the items within it.
• What is the difference between demand pull and cost push inflation?
• What is the wage-price spiral?
• What is the quantity theory of money, and what do the following mean? M, V, P, T/Q/Y?
• Why does MV=PQ?
• What is the process through which monetarists believe that an increase in M will lead to an increase in P (both direct and indirect methods)?
• What does this assume?
• Why might V not be constant?
• Why might Q/Y not be constant?
• Why has QE not led to huge amounts of inflation in the UK (and other advanced economies)?
• Why is inflation considered problematic for:

a. Pensioners

b. People on fixed incomes

c. Low income groups

e. Exporters

f. The exchange rate

g. People just below tax thresholds

h. Efficiency

i. The other macroeconomic objectives

• Why might this depend on whether:

a. Inflation is demand-pull or cost-push?

b. Anticipated or unanticipated?

• Why might inflation be desirable for:

a. Homeowners with mortgages

b. Governments with high national debts?

• How should an increase in interest rates reduce inflation? Over what timescale?
• Can you explain both domestic and internal channels?
• Explain how quantitative tightening (QT) could reduce inflation?
• Explain this by using the quantity theory of money.
• How would contractionary fiscal policy reduce inflation?
• How might supply-side reforms reduce inflation?
• In all cases explain why these solutions might not work or work but have undesirable side effects?

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10 commonly asked questions about inflation

Inflation has been running rampant over the past 12 months..

STACKER - In March, American consumer prices rose 8.5% from 2021, creating the sharpest increase in inflation since 1981.

The average national price for gas climbed to an all-time high of $4.33 per gallon in March, driven partially by the ban on Russian oil imports after the country’s invasion of Ukraine. Grocery costs are similarly rising: According to the Consumer Price Index, the cost of meat, fish, poultry, and eggs has increased 13% since February 2021, while fresh fruit prices have gone up more than 11% during the same span. The cost of electricity has increased 11%, while furniture and bedding went up 16%.

With inflation quickly becoming one of the top news stories in 2022, it’s no wonder more consumers are wondering what all this really means for them. PennyWorks examined some of the most commonly asked questions about inflation and provided insight into how it affects the larger economy and your wallet. From the general causes of inflation (and why we’re seeing such high inflation right now) to its effects on earning power and loans, understanding these topics can help you better understand inflation—and how it impacts your finances.

What causes inflation?

First, a definition: Simply put, inflation is a decline in purchasing power over time . Inflation can be caused by a variety of factors. For example, it can rise in a hot economy where people have a lot of cash to spend and businesses must raise prices to keep up with demand for their products. However, supply chain issues like the ones we saw as the global economy rebounded from the COVID-19 pandemic in late 2021 can also lead to increased prices. Global conflicts such as Russia’s invasion of Ukraine can create shortages of goods like oil, which in turn cause gas prices to spike.

Inflation is rarely caused by just one factor, so economists and policymakers often have their own interpretations of what exactly causes it. Other possible explanations for the current spike in inflation include a shift in consumer spending, a historical underinvestment in infrastructure, corporate greed, recent government stimulus packages, and rising wages.

Why has inflation been relatively low since 1980?

In the 1980s, high unemployment rates of more than 10% and a severe recession drove inflation down from the historic highs of the 1970s. Since then, inflation has largely remained stable and stayed within the Federal Reserve’s annual target inflation rate of 2%.

During the 1990s, the correlation between low unemployment and high inflation weakened, which forced economists to consider many other factors in the inflation puzzle. Some experts suggest that central banks adapted their monetary policy to combat spikes in inflation, which kept it stable for decades. Others believe workers’ power to advocate for higher wages fell with the decline of labor unions, which kept wage growth stagnant and therefore reduced inflation. The rise of the global supply chain and increased international trade also likely reduced consumer sensitivity to inflation.

Will prices go back down to what they were before inflation?

Unfortunately, there is no quick fix for high inflation. The Federal Reserve has begun to raise interest rates , which will make it more expensive to borrow money and should reduce consumer spending. Some industries are beginning to recover from the snags in the supply chain that started in late 2021.

On the other hand, some experts are beginning to report that inflation is becoming more likely to stick around longer , pointing to signs like rising rents and home prices. Overall, many economists predict that inflation will likely stay above the Federal Reserve’s 2% target for the rest of 2021.

Is inflation bad?

While paying higher prices for goods and services doesn’t usually excite consumers, not all experts believe that inflation is always a bad thing. Sharp rises in inflation—also known as hyperinflation —can destabilize economies, leading to hoarding of consumer products, losses of savings, and other societal issues.

Everyone can agree that hyperinflation is a problem, but more moderate increases in inflation are the subject of debate. Inflation can be a boon for small companies that can now charge more for their products, but at the same time, it negatively impacts lenders and people on fixed incomes. Similarly, inflation can help workers if it leads to higher wages, but hurt them if prices go up faster than pay.

How does inflation affect my earning power or the value of my salary?

If the prices of goods increase but your paycheck does not, inflation has effectively eroded your purchasing power . In other words, you can’t afford to buy as many products as you previously did.

For example, between September 2020 and September 2021, the consumer price index increased by 5.4% , according to the Bureau of Labor Statistics. Unless you were given a raise of 5.4% or more during that time period, the real-world value of your paycheck actually decreased. On the flip side, when inflation falls, your salary will go further, allowing you to buy more goods and services for the same dollar value.

What can I do to “protect” my savings or retirement against inflation?

When inflation increases, the value of cash decreases. That $10 bill can no longer buy you the same amount of groceries or gas it once could. If most of your savings are in cash, you’re effectively losing money over the long term as the power of the dollar diminishes.

In order to protect the buying power of your long-term savings, experts recommend investing in a diversified set of funds to help your money grow over time. Pay close attention to interest rates, as well. The rate hikes that the Federal Reserve has already set in motion should eventually increase the interest rates that banks will pay on savings accounts, in addition to the rates consumers pay on mortgages, credit cards, and other variable rate loans. It might not be worth sinking your cash into a fixed-term savings account with a low rate now if banks will be raising interest rates in the next year.

Why can’t the government just print more money?

It seems like a simple solution to the problem of inflation: Just give people more money to make up for the buying power they’re losing. Unfortunately, the economy doesn’t work that way. Historically, printing more money tends to actually increase inflation because there is too much demand (through the new cash) for an unchanged amount of goods.

In other words, increasing the number of bills and coins in circulation would only devalue the U.S. dollar overall. Furthermore, the U.S. government isn’t actually in charge of printing money—our central bank, the Federal Reserve, is. The Federal Reserve operates independently from the federal government in order to safeguard monetary policy from political pressures.

Which industries or sectors does inflation tend to impact first?

Every inflationary cycle is different . Increased demand for a certain product—like the hunt for toilet paper in the first days of the COVID-19 pandemic—could lead to a spike in prices in that industry. Or, conversely, disrupted supply chains could cause inflation to increase. Think about the computer chip scarcity that is contributing to the current shortage of new cars and, in turn, sky-high car prices. Industries that tend to experience the first effects of inflation include energy, utilities, real estate, and consumer staples.

Which industries or sectors will take the longest to recover?

Inflation often hits companies with large inventories, such as retail stores , particularly hard. When the cost of goods increases, it usually goes up at both the wholesale and retail level. That means that stores have to replace recently sold inventory with new products that come with higher price tags from wholesalers, which eats into profits. Small businesses also often suffer during inflation, as suppliers often favor larger companies in moments of high demand. Since small businesses usually buy smaller quantities of raw materials or wholesale products, they also have less leverage with suppliers.

How will inflation affect my loans?

It depends on what type of loan you have. If you’re making payments on a fixed-rate loan, inflation can actually improve your financial situation in certain circumstances. Because your interest rate on a fixed-rate loan doesn’t change with market fluctuations, the value of your loans actually decreases as inflation rises and the value of the dollar declines. However, you’ll only come out on top if your wages rise at the same rate as inflation.

Conversely, as the Federal Reserve raises interest rates to combat inflation, the interest rates on variable rate loans will also rise , increasing the amount of your monthly payments. Federal student loans, personal loans, and auto loans typically have a fixed rate. Credit cards, personal and home equity lines of credit, and private student loans often have variable interest rates. Mortgages can have either a fixed or adjustable interest rate ; check your account to see which type you have.

This story originally appeared on PennyWorks and was produced and distributed in partnership with Stacker Studio.

Copyright 2022 WBTV. All rights reserved.

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Everything you always wanted to know about inflation (but were afraid to ask)

Americans have lived under the grip of inflation since the COVID-19 pandemic hit the world in 2020 — and for many people, it's still a confusing time.

As part of a series looking at how Americans are dealing with inflation, NPR asked listeners and readers to share some of the main questions they still have about inflation.

Many answered, wondering about aspects of inflation that still don't make sense to them, like whether corporations are engaging in profit-taking or whether election years impact inflation.

Here's a compilation of the top six questions asked — along with their answers.

Are companies just using inflation as an excuse to increase their profits?

It's complicated. Companies have faced the same higher costs like the rest of us — and many of them have passed on those costs to consumers.

At the same time, some companies have also been able to use higher inflation as an opportunity to raise prices beyond what simple cost increases would explain. That's not a surprise. Companies exist to maximize profits, and they'll usually charge what they feel the market can bear.

"Corporate executives can take advantage of inflation," says Rakeen Mabud, chief economist at Groundwork Collaborative. "They can take advantage of things like supply chain issues to jack up prices above and beyond what their input costs would justify."

But there's some good news. Those "input costs" — or the costs related to producing something — are easing, which means companies no longer need to increase their prices as much.

At the same time, consumers are pushing back against aggressive pricing strategies, so companies are starting to back down. McDonald's, for example, brought back a $5 value meal following its first sales decline since the pandemic began.

How do high interest rates slow inflation?

High interest rates help combat inflation by raising the cost of borrowing money, which can then slow economic activity — and therefore consumer spending.

For example, somebody who has to pay more for a car loan or for their mortgage may have less to spend elsewhere.

And to combat inflation, the Federal Reserve has raised interest rates to their highest in over two decades.

Those higher rates have helped bring down inflation, which eased to an annual pace of 2.9% last month.

It's not just high interest rates helping to ease inflation. A big reason that inflation spiked during the pandemic was companies were not well prepared to meet the surge in demand for everything from iPhones to laptops from consumers stuck at home.

But companies have since responded to the shortages of goods seen during the pandemic by investing in supply chains.

"When we get new technology, better processes, better equipment, that can help reduce the cost of producing various goods and services, and that can be passed on to the consumer," says Sarah House, a senior economist at Wells Fargo.

Why is there a 2% target inflation rate — shouldn't it be 0%?

Setting a target inflation rate is seen as helping to ensure more stability in prices by giving a clear objective for the central bank.

New Zealand was the first country to set 2% as a target rate , in 1989, and most central banks followed suit, including the Fed, which made the target explicit in 2012.

While a 0% inflation rate may sound ideal in theory, economic growth requires some form of inflation.

Setting the target at 0% also raises the risk that the Fed could overshoot its objective, putting inflation at a negative rate, or deflation.

That's when prices fall, which may sound like a good thing, but it can be economically very harmful. Widespread price cuts are typically a symptom of economic distress.

How have election seasons impacted inflation?

In short, not by much.

Plus, economists note, each election year is different, so comparing them is rarely an apples-to-apples comparison.

The Fed has also usually fiercely guarded its independence in setting monetary policy — regardless of whether there's an election taking place.

Sometimes, though, an election can slow spending by both corporations and consumers, which can help ease inflation.

"Businesses and people are very unsure about who's going to win and what the future holds, so they decide to sort of pull back a little bit — you know, maybe not make that big expenditure, maybe not hire that new employee or make that investment until they know," says Julia Coronado, president of MacroPolicy Perspectives.

Why is it taking so long for inflation to ease?

This is where regular people and economists might see things differently.

"Inflation is coming down really fast by economist standards, and I know that's not the average person's standards," Coronado says.

Many people still feel they are paying more at the supermarket or at restaurants than they used to — and they are not incorrect.

Inflation during the pandemic rose more than many Americans had grown used to in years prior, and all the cumulative price increases continue to hit people's wallets.

But annual inflation is easing, from an over four-decade high of 9.1% in June 2022 to 2.9% in July of this year.

But that only means prices are no longer increasing as much. It doesn't mean that prices are falling, which is deflation. And as noted, that is not usually a good thing for the economy.

Is the only solution to inflation to go through a recession?

Thankfully, no — but a recession can occur.

The difficulty with monetary policy is that the impact of interest rate changes doesn't have an immediate effect: There's usually a delay in how they filter through the economy.

That makes deciding how much to raise interest rates — as well as how long to keep them high — a difficult exercise.

Economists had worried last year that the economy would be headed for a recession. Instead, the economy grew strongly .

But recent weaker-than-expected data on employment has raised concern that the Fed has kept interest rates too high and that the economy could be slowing sharply.

There are no guarantees that a recession is coming — most economists still don't expect one.

And while the Fed has kept interest rates steady since July 2023, many expect it to cut rates next month, by either a quarter percentage point or even more.

Copyright 2024 NPR

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Kamala Harris’s cost-of-living plan will end in failure

She is the latest presidential candidate to embrace self-defeating economics.

I t is easy enough to understand what is motivating Kamala Harris’s economic strategy. Poll after poll demonstrates that many Americans consider the cost of living to be their main concern heading into the election in November, and Ms Harris starts on the back foot , having served as vice-president during a time when inflation soared to a four-decade high. Rather than gloss over this ugly reality, she is trying to confront it. “Lower costs for American families” is the centrepiece of her economic agenda, a message she is likely to deliver again on August 22nd, in a speech to the Democratic National Convention.

But just because her strategy is understandable does not make it sensible. Her prescriptions risk taking America further down the road of self-defeating economic policies. The blame for this trajectory is certainly not Ms Harris’s alone: many other Democrats and Republicans, starting with Donald Trump, have already been pushing in such a direction, albeit with different emphases. Nevertheless, Ms Harris’s cost-of-living plan may open a new phase in the worrying odyssey. She takes aim at four categories of costs: housing; groceries; medical; and taxes. Although some of her ideas are good and helpful, many more would end up weighing on growth and driving up prices—the exact opposite of their intended effect.

Ms Harris’s central focus is housing. On this issue, her policies are encouraging, if taken at face value. She has called for the construction of 3m new homes over the next four years, and wants to provide federal funding and permitting reform to make this happen. Analysts reckon that America is suffering from a shortage of about 4m to 7m homes, so the additional supply would narrow the gap. Yet can Ms Harris actually get the houses built?

Never mind that her plan is light on details: the construction funding (she targets $40bn) would go to local governments, who would need to find their own solutions. Meanwhile, other elements would cut against her ambitious supply targets. She vows to go after Wall Street investors, whom she decries as “buying up and marking up homes in bulk”. They actually own less than 1% of America’s single-family homes, and have been building, rather than just buying, homes. Another pledge—one that received loud applause when she unveiled it in a speech in North Carolina on August 16th—is to give first-time homebuyers $25,000 towards downpayments on mortgages. With demand for homes still outstripping supply, extra cash of this kind may just translate into higher prices.

Ms Harris’s plan on groceries has come in for the sharpest criticism. She wants to pass the first-ever federal ban on price gouging on food and groceries. This may not herald a return to the price controls witnessed under President Richard Nixon in the 1970s, but the intellectual underpinning for such a policy is nonetheless half-baked. A common charge of the left-wing of American politics is that companies fuelled inflation during the covid-19 pandemic by taking advantage of shortages to jack up prices. But researchers with the Federal Reserve have concluded that there was no evidence of higher mark-ups at the aggregate level, which would have been a precondition for pricing decisions to truly cause inflation. Moreover, higher prices for everything from cars to ham served as a crucial signal to firms to make more and to consumers to curb demand.

Concerns about Ms Harris’s anti-gouging proposal should be tempered by the fact that it is unlikely to ever make it through Congress. Yet legislative infeasibility does not excuse sloppy thinking, and a focus on corporate greed indicates that she is at least partly in thrall to the progressive flank of the Democratic party. Although Ms Harris’s promise to crack down on unfair mergers and acquisitions in the food industry that lead to less competition and higher prices is unobjectionable, in reality it is little more than a restatement of America’s existing anti-monopoly policy. The Federal Trade Commission is, for instance, currently embroiled in a legal battle to block the biggest supermarket merger in American history.

A bitter pill

Some of the medical elements of Ms Harris’s plan are, in theory, more welcome. She is right to want to bring down America’s outrageously high medical costs. But as with any price controls, caps on the cost of insulin (at $35 a month) and out-of-pocket expenses for prescription drugs (at $2,000 a year) risk generating unwanted outcomes. Similar steps by the Biden administration to cap drug costs for seniors are now threatening to cause hefty increases in their insurance premiums.

Ms Harris has also said that she would work with states to cancel medical debts. Again, her aim is laudable: it is scandalous that so many Americans are saddled with medical debt. Yet just cancelling debt would only reset the clock for them, with debts once again piling up whenever they need medical attention. “Why are health care costs so high in the first place? That’s a legitimate question but it does not lend itself to quick fixes,” says Glenn Hubbard of Columbia University. “I think both parties have devolved into any area where they don’t want to do long-term planning and thinking, and so they do the soundbites, which of course will fail.”

The final part of Ms Harris’s economic strategy involves targeted tax cuts. For low- and middle-income families, she would increase the child tax credit, including $6,000 during a baby’s first year of life, up from $2,000 now. And she would expand the reach of the earned income tax credit—an important subsidy for poorer Americans—to those without children. Judged on their own merits, Ms Harris can make a strong case for both of these changes. When the child tax credit was greatly expanded during the pandemic, for instance, it led to a nearly 50% reduction in child poverty rates. As Ms Harris puts it, that is an investment in America’s future.

These tax cuts would not come in isolation, however. America’s budget deficit is running at about 7% of GDP , a level previously associated with wars or recessions, while the national debt is continuing to climb higher. Neither of the candidates has offered any serious proposals about how to clean up the country’s fiscal picture, and would in all likelihood make it worse. Ms Harris has said that she will follow President Joe Biden’s previously outlined plans to raise corporate tax rates to 28%, from 21%, but to only increase income taxes on individuals earning more than $400,000 annually. Together, these changes would not generate enough revenue to cover the full cost of her agenda. The shortfall would add about $1.4trn to America’s deficit over the next decade, according to Piper Sandler, an investment bank. That is a lot, even if less than the cost of Mr Trump’s tax-cutting plan, which is estimated to be about $4.5trn over the next decade.

Sticker shock

Indeed, one of the best things that can be said for Ms Harris’s economic agenda is that it will probably be less damaging than Mr Trump’s. She is clearly against the tariff increases her opponent has promised. Many of her proposals amount to adjustments to existing policies, rather than representing a wholesale recrafting of America’s economic system, and stand little chance of legislative success. Mr Trump, by contrast, may be able to use the power of the presidency to slap across-the-board tariffs on all imports to America, the central plank of his economic programme—and one that Ms Harris has criticised, correctly, as being a sales tax in disguise.

“Trump really seems to think that we’d be better off as an autarkic economy,” says Greg Mankiw of Harvard University. “The worry for Harris is that she helped to implement industrial policy with a lot of buy-American rules, so it seems she’s bought into the anti-globalisation stuff to some extent.” “Not as bad as the other candidate” would be a poor campaign slogan. It is, however, an accurate summary of Ms Harris’s economic plans. ■

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