Inflation and Government Economic Policies, Research Paper Example

Inflation is described as the gradual and sustained increase in the general price levels of commodities. The prices increase due to a various number of reasons and they affect demand and prices of commodities. The increase in price can be due to the situation when demand for goods and services surpasses supply. This creates a shortage which in turn causes the prices of commodities to increase. Inflation can be caused by an increase in money supply in the market (Meltzer, 2009). This means that there is too much currency chasing too few goods, this lowers the value of the currency and thus its purchasing power. This means consumers will require more currency to purchase the similar amount of goods, raising prices in essence. By increasing reserve requirements, banks will be required to increase their deposits with the Federal Reserve, reducing the amount of money banks have, thus reducing the money supply in the market to increase value of the currency and its purchasing power.

CPI has been increasing at different rates since 2000. CPI increased steadily between 2000 (at 172.2) and 2007 (at 207.3). It has since been increasing at different rates to the present 2014 (at 237.072 as of April 2014). These fluctuations have been caused by the changes in oil prices in recent years. This was the largest component of CPI that has experienced considerable change.

The Producer Price Index is an index that depicts the prices that all producers originating from a given nation receive from the sale of all their output. As shown in the graph, PPI has been fluctuating with the prevailing economic conditions. PPI increased sharply between September 2007 and September 2008 (Bureau of Labor Statsics, 2014). This was because the economic slump at the time enabled producers to post the increase in cost to the consumer.

The Consumer Expenditure Survey (CE) is a measure that provides all the information pertaining to the buying habits of consumers in the United States. The since 2000, the survey has depicted a steady growth in the total number of consumer units. However, certain sectors have been affected owing to the last economic downturn. The drop in consumer expenditure in certain areas between 2007 and 2010 can be attributed to the decrease in disposable income caused by the increase in inflation. However, the increase in investment seen in mid-2010 increased disposable income as investment opportunities began to open up for consumers.

Putting in mind the recent trends in economic policy that is aimed at managing inflation, expenditure is expected to increase as the US seeks new markets for its commodities with trade treaties across the globe. This is expected to provide an increase in employment opportunities and increased national income.

The measures shown above (CPI, PPI and CE) depict that consumer expenditure is directly proportional to disposable income that is affected by inflation. This also highlights that income has not changed enough to offset inflation as the increase in disposable income has not increased the consumers’ purchasing power, relative to the increase in inflation prevailing within the economy.

These measures have a considerable impact in the decision making process employed in the formulation of economic policy for the country. It is essential in identifying consumer expenditure patters by industry and find ways of increasing expenditure in certain industries.

References

Blanchard, O., & Johnson, D. R. (2013). Macoreconomics. Boston: Pearson.

Krugman, P. R., & Wells, R. (2013). Macroeconomics. New York: Worth Publishers.

Meltzer, A. H. (2009). A history of the Federal Reserve: 1970-1986. Chicago: University of Chicago Press.

U.S. Department of Commerce. (2014, May 3). U.S. Economic Accounts. Retrieved from Bureau of Economic Analysis: http://www.bea.gov/index.htm