argumentative essay about inflation

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Free Inflation Argumentative Essay Example

Type of paper: Argumentative Essay

Topic: Government , Inflation , Economics , Money , Economy , Policy , Taxes , Shopping

Words: 1200

Published: 08/06/2021

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Inflation is the continuous increase in the general price levels of commodities in the economy over a period. It is identified with the market fall of the value of money in a particular economy. This recurring price increase erodes the purchasing power of money creating economic distortions and uncertainty (Sargent 2002). Inflation may also be described as a sudden increase in supply of money in a given economy. This results to each unit of currency buying fewer commodities thus a reduction in the purchasing power per unit of money. It can also be viewed as an increase in the supply of money at a rate that is higher than the rate of production in the country's economy. When this price increase is gradual and irregular, it leads to creeping inflation. This is healthy for the economy. It stimulates the economy encouraging social and economic progress. It also makes it easier to adjust relative prices such as salaries employees receive.

While mild and gradual inflation is considered to be an indicator of a healthy economy, inflation above this slow rate has a negative impact in the economy. Taxes imposed to citizens increases with increases in supply of money to the economy. This makes people become more willing to spend because of two main reasons: to purchase commodities before they increase in price and to avoid paying tax on holding currencies. This results to the increase in demand for different commodities thus raising their prices as dictated by price mechanism. This strengthens the rate of inflation and increases the velocity of money; a process referred to as a vicious cycle and is difficult to harness, leading to hyperinflation (Laubach, Mishk, 2001). High inflation rates and hyperinflation lead to bad economic times. As prices rise, the purchasing power of a currency unit decreases thus leading to an increase in uncertainty. This encourages purchasing greasing the vicious cycle while at the same time discouraging savings and investments. Unequal redistribution of money will result. People who receive fixed incomes will continue receiving the same amount which in turn reduces their purchasing power while those on flexible incomes will be able to adjust to inflation. Money will thus be redistributed from those with fixed incomes to those with flexible income. If the inflation rate is higher compared to that abroad, it will lead to deficits in balance of payment resulting from international trade.

Unless it has gone far out of hand, inflation is a controllable. Several approaches can be used to control this. The federal reserve of the U.S counters inflation rates by different fiscal and monetary policies. Fiscal policies come in the form of federal budgeting policies and taxation. However, most market watchers look at financial policies to stabilize the economy. In the US, The Federal Reserve Board's Open Market Committee FOMC is in charge of implementing monetary policies (Sargent 2002). They are charged with the responsibility of limiting or increasing the amount of money circulating in the economy. They make money easier to come by thus encouraging spending to spur economic growth or make it harder to come by when growth rates reach unsustainable levels.

In general, Central Banks in all economies fight inflation by setting high interest rates and reducing the supply of money in the economy. Income policies/ wage and price control policies can be introduced to fight inflation rates. This process all the same has negative effects including distortion of the overall functioning of the economy as it encourages shortages and decrease in quality of commodities. There are several ways used to measure inflation. Consumer Price Index (CPI) is widely used. This approach measures the average prices of a fixed basket of goods and services. This basket of goods reflects what a typical family buys to achieve some desired standard of living in a given period. In the USA, the base set is currently 1982-1984. This base period is adjusted after a given number of years. The Bureau of Labor Statistics (BLS) compiles it on a monthly basis. They weigh each item in the basket according to its total household expenditure share in the base period in order to reflect changes in the index periodically to represent the current household cost of living (Sargent 2002). The items are grouped into eight categories which include: housing, apparel, education and communication medical care and transportation. The three main CPI used are: CPI for all urban consumers, Chained CPI for all urban consumers and CPI for urban wage earners and clerical workers.

Producer Price Indexes (PPI) is another method of measuring inflation by the federal government. It measures average changes in price domestic producers receive for their output using weights attached to their output. It covers virtually all industries. It is compiled monthly by the BLS. Personal Consumption expenditure (PCE) is another method of measuring inflation. The Bureau of Economic Analysis computes it on a monthly basis from the National Income and Products Account NIPA.

Inflation has different economic costs. It has a huge impact on savers, as they lose confidence in money as a real value of saving. It may also lead to higher demand of wages as people anticipate to maintain their current living conditions. Inflation also has an impact on a country's competitiveness and unemployment rate. When a country experiences higher inflation rate than another, it leads to loss in competitiveness worsening their performance in trade. This results to increase in unemployment rate.

Business planning and investment can be disrupted by inflation. Budgeting is made hard due to uncertainties created by rise in prices and costs.Inflation has a couple of other positive consequences associated with it. A stable low rate can allow organizations to raise their revenues, prices and profits and their workers can anticipate an increase in their wages as result (Laubach, Mishk, 2001). Low stable inflation can also help reduce the real value of outstanding debts. A good example is mortgage beneficiaries who benefit from inflation to reduce the real burden on their mortgage.

Fluctuation in exchange rates can also have effects on inflation. Fall in value of the domestic currency against other currencies causes higher import prices. Rising of labor costs that are greater than the improvement in productivity also results into inflation. It is difficult to forecast inflation. Some of the reasons behind this include: volatile energy prices, change in value of currency in relation to other foreign currencies, change in indirect government taxes, volatile food prices and uncertain growth of demand Inflation is a natural phenomenon that a healthy economy must experience. Too high inflation rates and zero inflation rates are, however, harmful to the economy. The government is the entity vested with the responsibility of controlling inflation. When it fails to control it, such negligence will be equated to stealing from its people (Sargent 2002).

Laubach, T. Mishk, F. (2001). Inflation Targeting: Lessons from the International Experience. New Jersey. Princeton University Press. Sargent, T. (2002). The Conquest of American Inflation Princeton paperbacks. New Jersey. Princeton University Press, 2002

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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.

Related Articles:

• 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

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The debate over what's causing inflation

Wailin Wong

Darian Woods

The last few months have been a painful crash course on inflation. We've been forced to become quick learners as the price of rent, gas and other essentials have soared in the first half of 2022.

Economists have a few general explanations for inflation:

Sometimes it happens when increased competition for a limited amount of homes, cars and a number of other essentials drives up their prices. This is demand-pull inflation .

Sometimes it happens when the price of a good or service (like uhhhhhh gas for example) increases dramatically because the cost of producing it is higher. This is cost-push inflation.

Sometimes there's just too much money in the economy.

But economists can't agree so far on what caused this particular bout of inflation, whether it was preventable and most importantly, who or what is to blame.

On today's show, we hear from an economist who says the federal government bears responsibility for our current inflation. And we'll also hear why Federal Reserve Chairman Jerome Powell was so slow to respond to the threat of inflation.

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Facing down a surprising U.S. inflation surge

Kennedy School experts in public finance and economic policy weigh in on the causes and responses to the highest American consumer price jump in three decades.

Inflation in the United States has jumped to the highest level in 30 years, reaching 6.2% in October as measured by the Consumer Price Index. The COVID-19 pandemic has fueled consumer demand for goods and services at a time when supply lines are constrained and many industries have been affected by staff shortages. The inflation surge has generated intense political debate on the causes and the appropriate response.

We asked several economists and public finance experts at Harvard Kennedy School—all of whom have held senior federal government economics roles—to offer brief perspectives on how they view the underlying issues and the key policy choices facing the Biden administration and Congress. 

• Linda Bilmes - Inflation's impact at the state and local level
• Karen Dynan - Weighing the uncertainties
• Jeffrey Frankel - Inflation Do's and Don'ts
• Jason Furman - Supply and demand challenges
• Lawrence H. Summers - Biden team needs to signal its concern about inflation

Inflation risks also lie ahead for state and local governments

On the revenue side, income and sales tax receipts will largely keep pace with inflation, so moderate inflation is unlikely to have a major impact. However, if inflation leads to sharply higher interest rates that lead to a stock market sell-off, then states that are highly dependent on capital gains taxes (such as California and New Jersey) may suffer. Another area of vulnerability could be property taxes, especially states where increases in assessed values or in property taxes are capped, as with California’s Prop. 13. These prevent rising house prices feeding through into state revenues, and are also the major revenue source for local governments.

On the expense side, the biggest risk is rising wages, which consume the largest share of state budgets. We could see public sector unions pushing for a return of “CPI-plus” language in new labor agreements. This would automatically bake in the cost of higher inflation to local expenditures. In addition, high inflation could significantly weaken state pension plans, many of which assume that future wage increases will be only 2%.  Most of the current generation of local pension managers have little experience with inflation. They need to begin adjusting their portfolios now to prevent erosion of their asset bases.

Linda Bilmes is the Daniel Patrick Moynihan Lecturer in Public Policy and previously served as Assistant Secretary of Commerce.

What's certain is just how many uncertainties lie ahead

What is not clear is how quickly these issues will resolve. The size and persistence of demand/supply imbalances has repeatedly surprised us, in part because virus caseloads have stayed unexpectedly high. We have only a limited understanding of why so many would-be workers are staying out of the labor force, making it hard to predict how many will return and how quickly. We are not sure how much inflation expectations have risen (a critical determinant of whether higher inflation sticks) because of measurement difficulties.

This uncertainty makes it difficult for monetary policymakers to know when they need to begin raising rates to avoid letting inflation stay at undesirably high levels. Given that they may need to revise their views quickly based on incoming data, it is especially important that they communicate the high degree of uncertainty. Surprising financial markets with an abrupt unexpected change in policy could lead to a rapid decline in asset prices that causes a significant setback in the economic recovery.

Karen Dynan is a professor of the practice of economics and former chief economist of the U.S. Treasury.

Some inflation-fighting do's and don'ts

Let’s start with two don'ts.

• Don’t do what Federal Reserve Chair Arthur Burns and President Richard Nixon did in 1971, in order to help the president’s reelection: They responded to moderate 5% to 6 % inflation with a combination of rapid monetary stimulus and doomed wage-price controls. The lid was blown off the boiling pot a few years later; the inflation rate jumped above 12%.
• Don’t do what Donald Trump did on April 2, 2020 , to help out American oil producers: He persuaded Saudi Arabia that OPEC must cut oil output and raise prices.
• Continue to fight in the Senate for a fully funded social spending bill (“Build Back Better”).
• Let imports into the country more easily.  They are a safety valve for an overheated economy.  Trump put up a lot of import tariffs , which raise prices to consumers—sometimes directly, as with washing machines, and sometimes indirectly, as with steel and aluminum, which are important inputs into autos and countless other goods. With or without foreign reciprocation, U.S. trade liberalization could bring prices down quickly in many supply-constrained sectors. 
• Similarly, facilitating orderly immigration would help alleviate the shortage of workers that employers in some sectors are experiencing.
• Further vaccination would increase the supply of labor, through several possible channels.  One channel would be to keep children in school, allowing more parents to go back to work. Another channel is to alleviate worker’s fears of infection in the workplace. 

Jeffrey Frankel is the James W. Harpel Professor of Capital Formation and Growth and was a member of the Council of Economic Advisors from 1983-1984 and 1996-1999.   

Supply and demand—and the Federal Reserve’s key role

Economists like to explain everything with demand and supply, and the concepts work well here. Demand is likely to remain high, fueled by households with healthy balance sheets, continued fiscal support, and very low interest rates. No one knows how long it will take supply to recover, or even whether it will fully recover, but it could be at least a year. The combination of strong demand and weak supply will likely keep inflation uncomfortably high.

President Biden can do a little about inflation by helping with port capacity and other supply-chain measures. Even better would be dropping President Trump’s tariffs on China. But these steps would only be small. The main agency charged with controlling inflation is the Federal Reserve. They are right to continue to be focused on the millions of people without jobs but should recalibrate towards incorporating more concern for inflation into their policy stance, including setting a default of more rate increases in 2022, something it can call off if inflation and/or employment is well below what we are currently expecting.

Jason Furman is the Aetna Professor of the Practice of Economic Policy and previously was chair of the Council of Economic Advisors under President Obama.

Biden team needs to signal its determination to address inflation

 Simultaneously, the Administration should signal that a concern about inflation will inform its policies generally. Measures already taken to reduce port bottlenecks may have limited effect but are a clear positive step. Buying inexpensively should take priority over buying American. Tariff reduction is the most important supply-side policy the administration could undertake to combat inflation. Raising fossil fuel supplies, such as the recent deployment of the Strategic Petroleum Reserve, is crucial. And financial regulators need to step up and be attentive to the pockets of speculative excess that are increasingly evident in financial markets.

 Excessive inflation and a sense that it was not being controlled helped elect Richard Nixon and Ronald Reagan, and risks bringing Donald Trump back to power. While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed.

Lawrence H. Summers is Charles W. Eliot University Professor , Weil Director of the Mossavar-Rahmani Center for Business and Government,  and president emeritus of Harvard University. His government positions included Secretary of the Treasury in the Clinton Administration and Director of the National Economic Council under President Obama. Portions of this essay were excerpted from a Washington Post column .

Banner image by AP Photo/Noah Berger; inline image by Xinhua via Getty Images; faculty portraits by Martha Stewart

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Economic essays on inflation

• Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level.
• Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply.

• Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment.

• Problems measuring inflation – why it can be hard to measure inflation with changing goods.
• Different types of inflation – cost-push inflation, demand-pull inflation, wage-price spiral,
• How to solve inflation . Policies to reduce inflation, including monetary policy, fiscal policy and supply-side policies.
• Trade off between inflation and unemployment . Is there a trade-off between the two, as Phillips Curve suggests?
• The relationship between inflation and the exchange rate – Why high inflation can lead to a depreciation in the exchange rate.
• What should the inflation target be? – Why do government typically target inflation of 2%
• Deflation – why falling prices can lead to negative economic growth.
• Monetarist Theory – Monetarist theory of inflation emphasises the role of the money supply.
• Criticisms of Monetarism – A look at whether the monetarist theory holds up to real-world scenarios.
• Money Supply   – What the money supply is.
• Can we have economic growth without inflation?
• Predicting inflation
• Link between inflation and interest rates
• Should low inflation be the primary macroeconomic objective?

See also notes on Unemployment

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Finance & Development

Inflation: Prices on the Rise

Back to Basics

Credit: ISTOCK / RASTUDIO

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BACK TO BASICS COMPILATION

Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year

It may be one of the most familiar words in economics. Inflation has plunged countries into long periods of instability. Central bankers often aspire to be known as “inflation hawks.” Politicians have won elections with promises to combat inflation, only to lose power after failing to do so. Inflation was even declared Public Enemy No. 1 in the United States—by President Gerald Ford in 1974. What, then, is inflation, and why is it so important?

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

Measuring inflation

Consumers’ cost of living depends on the prices of many goods and services and the share of each in the household budget. To measure the average consumer’s cost of living, government agencies conduct household surveys to identify a basket of commonly purchased items and track over time the cost of purchasing this basket. (Housing expenses, including rent and mortgages, constitute the largest component of the consumer basket in the United States.) The cost of this basket at a given time expressed relative to a base year is the  consumer price index  (CPI), and the percentage change in the CPI over a certain period is  consumer price inflation , the most widely used measure of inflation. (For example, if the base year CPI is 100 and the current CPI is 110, inflation is 10 percent over the period.)

Core consumer inflation  focuses on the underlying and persistent trends in inflation by excluding prices set by the government and the more volatile prices of products, such as food and energy, most affected by seasonal factors or temporary supply conditions. Core inflation is also watched closely by policymakers. Calculation of an overall inflation rate—for a country, say, and not just for consumers—requires an index with broader coverage, such as the  GDP deflator .

The CPI basket is mostly kept constant over time for consistency, but is tweaked occasionally to reflect changing consumption patterns—for example, to include new hi-tech goods and to replace items no longer widely purchased. Because it shows how, on average, prices change over time for everything produced in an economy, the contents of the GDP deflator vary each year and are more current than the mostly fixed CPI basket. On the other hand, the deflator includes nonconsumer items (such as military spending) and is therefore not a good measure of the cost of living.

The good and the bad

To the extent that households’  nominal  income, which they receive in current money, does not increase as much as prices, they are worse off, because they can afford to purchase less. In other words, their  purchasing power  or  real —inflation-adjusted—income falls. Real income is a proxy for the standard of living. When real incomes are rising, so is the standard of living, and vice versa.

In reality, prices change at different paces. Some, such as the prices of traded commodities, change every day; others, such as wages established by contracts, take longer to adjust (or are “sticky,” in economic parlance). In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation.

Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates. Take pensioners who receive a fixed 5 percent yearly increase to their pension. If inflation is higher than 5 percent, a pensioner’s purchasing power falls. On the other hand, a borrower who pays a fixed-rate mortgage of 5 percent would benefit from 5 percent inflation, because the  real interest rate  (the nominal rate minus the inflation rate) would be zero; servicing this debt would be even easier if inflation were higher, as long as the borrower’s income keeps up with inflation. The lender’s real income, of course, suffers. To the extent that inflation is not factored into  nominal interest rates , some gain and some lose purchasing power.

Indeed, many countries have grappled with high inflation—and in some cases  hyperinflation , 1,000 percent or more a year. In 2008, Zimbabwe experienced one of the worst cases of hyperinflation ever, with estimated annual inflation at one point of 500 billion percent. Such high levels of inflation have been disastrous, and countries have had to take difficult and painful policy measures to bring inflation back to reasonable levels, sometimes by giving up their national currency, as Zimbabwe has.

Although high inflation hurts an economy,  deflation , or falling prices, is not desirable either. When prices are falling, consumers delay making purchases if they can, anticipating lower prices in the future. For the economy this means less economic activity, less income generated by producers, and lower economic growth. Japan is one country with a long period of nearly no economic growth, largely because of deflation. Preventing deflation during the global financial crisis that began in 2007 was one of the reasons the US Federal Reserve and other central banks around the world kept interest rates low for a prolonged period and have instituted other monetary policies to ensure financial systems have plenty of liquidity.

Most economists now believe that low, stable, and—most important—predictable inflation is good for an economy. If inflation is low and predictable, it is easier to capture it in price-adjustment contracts and interest rates, reducing its distortionary impact. Moreover, knowing that prices will be slightly higher in the future gives consumers an incentive to make purchases sooner, which boosts economic activity. Many central bankers have made their primary policy objective maintaining low and stable inflation, a policy called  inflation targeting .

What creates inflation?

Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise. This relationship between the money supply and the size of the economy is called the  quantity theory of money  and is one of the oldest hypotheses in economics.

Pressures on the supply or demand side of the economy can also be inflationary.  Supply shocks  that disrupt production, such as natural disasters, or raise production costs, such as high oil prices, can reduce overall supply and lead to “cost-push” inflation, in which the impetus for price increases comes from a disruption to supply. The food and fuel inflation of 2008 was such a case for the global economy—sharply rising food and fuel prices were transmitted from country to country by trade. Conversely,  demand shocks , such as a stock market rally, or  expansionary policies , such as when a central bank lowers interest rates or a government raises spending, can temporarily boost overall demand and economic growth. If, however, this increase in demand exceeds an economy’s production capacity, the resulting strain on resources is reflected in “demand-pull” inflation. Policymakers must find the right balance between boosting demand and growth when needed without overstimulating the economy and causing inflation.

Expectations  also play a key role in determining inflation. If people or firms anticipate higher prices, they build these expectations into wage negotiations and contractual price adjustments (such as automatic rent increases). This behavior partly determines the next period’s inflation; once the contracts are exercised and wages or prices rise as agreed, expectations become self-fulfilling. And to the extent that people base their expectations on the recent past, inflation would follow similar patterns over time, resulting in inflation  inertia .

How policymakers deal with inflation

The right set of  disinflationary policies , those aimed at reducing inflation, depends on the causes of inflation. If the economy has overheated, central banks—if they are committed to ensuring price stability—can implement  contractionary  policies that rein in aggregate demand, usually by raising interest rates. Some central bankers have chosen, with varying degrees of success, to impose monetary discipline by  fixing the exchange rate —tying the value of its currency to that of another currency, and thereby its monetary policy to that of another country. However, when inflation is driven by global rather than domestic developments, such policies may not help. In 2008, when inflation rose across the globe on the back of high food and fuel prices, many countries allowed the high global prices to pass through to the domestic economy. In some cases the government may directly set prices (as some did in 2008 to prevent high food and fuel prices from passing through). Such  administrative price-setting  measures usually result in the government’s accrual of large subsidy bills to compensate producers for lost income.

Central bankers are increasingly relying on their ability to influence  inflation expectations  as an inflation-reduction tool. Policymakers announce their intention to keep economic activity low temporarily to bring down inflation, hoping to influence expectations and contracts’ built-in inflation component. The more credibility central banks have, the greater the influence of their pronouncements on inflation expectations.

Ceyda Oner is a deputy division chief in the IMF’s Finance Department.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

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Why We Care About Inflation

President, Federal Reserve Bank of Richmond

Cecil County Chamber of Commerce Elkton, Md.

Highlights:

• Since the mid-'90s, inflation has been low and stable. But no one is forgetting inflation today. At first, inflationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the inflationary news just keeps coming.
• All of this has depressed consumer sentiment, and business sentiment has fallen too. So, we need to get inflation under control.
• I see inflation coming down on two paths. A number of these pandemic-era pressures will eventually settle. At the same time, interest rates will impact demand and expectations. And, as we act, we send messages to consumers and firms that will manage their expectations for future inflation. All this will take a little time, but make no mistake, we are on the case.

It’s great to be with you in person today — and thank you to Debbie and Sharon for inviting me and that nice introduction. I want to spend today talking about inflation. These are my views alone and not those of any of my colleagues on the FOMC or in the Federal Reserve System.

I grew up in the ‘60s and ‘70s — an era when inflation emerged and then became omnipresent and painful. A wage and price freeze left supermarket shelves bare. Twin oil crises led to panic at the pump. President Ford issued Whip Inflation Now buttons. You couldn’t go anywhere without hearing the Bee Gees — it was a tough time. By the mid-‘70s, core Personal Consumption Expenditure (PCE) inflation reached 10.2 percent — nearly twice as high as what it is today.  

But in the early ‘80s, the Fed under Paul Volcker actually did whip inflation. Of course, things got bad before they got better — it was the ultimate hard landing: Unemployment reached nearly 11 percent in 1982. The economy fell into not one, but two recessions. But since the mid-‘90s, inflation has been low and stable. And the Fed learned a hard lesson: the role inflation targeting plays in delivering anchored inflation expectations, thereby creating a healthy foundation for the economy. 

I have a theory that memory matters. Recessions happen every 8-10 years because that’s how long it takes for a leadership team to rotate, believe they know better and then repeat the errors of their predecessors. Real estate lenders overreach every 15-20 years (1970s, 1990s, 2000s) as credit officers turn over and memories fade. The Roaring ‘20s, the Go-Go ‘60s and the internet bubble of the early 2000s perhaps demonstrated that market memories only last 30-40 years. And after 30 years of price stability, maybe the same thing happened with inflation. Prior to the pandemic, the focus was on how to move inflation up, not down. The Phillips curve came into question. Virtually no professional forecaster predicted the high, persistent inflation we’ve been experiencing.

Well, no one is forgetting inflation today. The most recent Consumer Price Index is 8.5 percent. The headline PCE, our preferred metric, is 6.6 percent. Core PCE is at 5.2 percent. Demand is strong and looks to remain robust, fueled by healthy business and personal balance sheets, the need to replenish low inventories and state governments that are flush with cash. Supply chains have been overwhelmed, and suppliers are struggling to bring them back into balance. Labor markets are also tight: Unemployment has dropped to 3.6 percent. In addition, the pool of available labor has shrunk: 1.2 million fewer workers are in the workforce, and immigration remains well below its pre-COVID-19 trend. 1 As a result, price pressures are everywhere. Inflation is high, persistent and broad-based.

At first, inflationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the inflationary news just keeps coming, whether it is a severe winter storm in Texas, a fire at a chip plant in Japan, a ship lodged in the Suez Canal or a backlog in Long Beach. And, of course, most recently, we’ve seen commodity price shocks coming out of the conflict in Ukraine and new lockdowns in China. These have made inflation the headline of the day — as of May 1, the Wall Street Journal has had an inflation story on its front page 25 times this year. And on social media, a widely shared post jokes that in 2020 we couldn’t leave the house because of COVID-19; now, we can’t leave because of skyrocketing gas prices.

All of this has depressed consumer sentiment. In the most recent Michigan Survey, the overall index of consumer sentiment (April - 65.2) was at levels last seen in the aftermath of the Great Recession and is below where it was at the height of pandemic lockdowns. That is remarkable given the strength of the economy and the job market. But sentiment is being driven heavily by inflation. Respondents expect the year-ahead inflation rate to remain high at 5.4 percent. The last two months have had the highest expectations since 1981. Thirty-eight percent say they’re in a worse financial position than they were a year ago. Buying conditions for purchasing a car, a house or an appliance are at their lowest levels since the early ‘80s. 2

Business sentiment has fallen too. In the Richmond Fed’s most recent CFO Survey (conducted in partnership with Duke and the Atlanta Fed), optimism about the U.S. economy dropped nearly 6 points from the fourth quarter of 2021. CFOs cited cost pressures and inflation as their top concerns. When looking at small-business owners, optimism is even lower. In March, owners who expect better business conditions over the next six months dropped to the lowest level in the survey’s history. Like the CFOs we surveyed, inflation was their top business problem.

We now remember that people thoroughly dislike inflation. Workers who feel they have earned their wage gains feel arbitrarily pinched at the gas pump. Homeowners like their sale price but can’t believe their purchase price. Businesses work to capture value through pricing but feel they’re being taken advantage of by suppliers. They feel powerless in the face of cost increases that tax their revenues, earnings and appreciation they have worked to achieve. 

Why do people hate inflation? Well, no one likes to deal with change, and we haven’t had to think about inflation for over a generation. And no one remembers the ‘70s fondly. Inflation creates uncertainty — as prices rise unevenly across sectors and over time, it becomes unclear when is the right time to spend versus save and where to invest. Inflation is also inherently redistributive — in the ‘70s, those who owned a house with a cheap mortgage benefitted; those on fixed incomes didn’t. Those who had wages indexed to inflation did better than those who didn’t. And inflation adds to your workload. It takes effort to shop around for better prices. Businesses have to handle complaints from unhappy customers, negotiate with insistent suppliers and address any resulting margin pressure. Finally, Robert Shiller taught us that people feel inflation erodes their standard of living by diminishing their buying power, whether it raises their nominal income or not. Higher prices mean you can buy less.

The pain of inflation tends to hit low- and fixed-income populations the most. Low-income households dedicate a higher percentage of their wages to consumption than those with higher incomes. There are estimates that the average U.S. household will have to spend over $5,000 more this year compared to last year for the same consumption basket, and that impacts those who have a tighter monthly budget.

To be clear, not everyone loses with inflation. We have sectors where nominal wages are up well in excess of inflation, like leisure and hospitality. We have a lot of homeowners whose houses are worth much more than they could have imagined. And a number of firms reported record profits last year. But it doesn’t matter — everyone hates inflation.

So, we need to get inflation under control. Congress has given us this mandate. And it’s time.

We can’t do much about short-term price surges. Think of it like the aftermath of a hurricane. Lumber prices increase temporarily as demand spikes for materials to make necessary repairs. Raising rates wouldn’t lower lumber prices when people need to rebuild their homes. Instead, when supply catches up to demand, these price movements reverse themselves.

But in the medium term, our moves matter. So, we have begun a tightening process. We raised interest rates 25 basis points in March and then another 50 basis points in May. We also announced our plans to reduce our balance sheet, starting on June 1. During his press conference, Chair Powell noted that additional 50 basis point increases could be on the table in coming meetings as we work to normalize rates.

We will do what we need to do to contain inflation. But how exactly will our rate moves do that? I see inflation coming down on two paths. A number of these pandemic-era pressures will eventually settle. Chips will finally get into cars, and car prices will come down. Labor force participation will continue to rise as COVID-19 eases. Ports will open up as consumers rotate back from goods to services. At the same time, interest rates will impact demand and expectations. Borrowing rates have already risen, and that will affect investment levels and spending on interest-sensitive items like houses and cars. And, as we act, we send messages to consumers and firms that will manage their expectations for future inflation. All of this will take a little time, but make no mistake, we are on the case.

You might ask if this path requires a Volcker-like recession. Not necessarily. At 83 basis points, we are still far from the level of interest rates that constrains the economy; for my colleagues on the FOMC, this neutral rate is in the range of 2-3 percent. And before the Great Recession, the economy handled rates even higher than that. Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not.

Inflation is high. It has real costs to both individuals and businesses. By contrast, getting inflation closer to the target rate creates the certainty that enables growth and supports maximum employment. That’s why we care, and that’s why we are tackling it.

This reflects the difference in total nonfarm payroll employment between February 2020 and April 2022. Bureau of Labor Statistics via Haver Analytics.

Buying conditions for purchasing a house and large household goods are at their lowest levels since the early 1980s. Buying conditions for purchasing a car are at their lowest levels on monthly records dating back to 1978.

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122 Inflation Essay Topic Ideas & Examples

🏆 best inflation topic ideas & essay examples, 👍 good essay topics on inflation, ⭐ simple & easy inflation essay titles, 💡 interesting topics to write about inflation.

• Increasing Inflation Impact on Individuals In simpler terms, inflation is the rise in the cost of living due to an exaggerated increase in commodity prices. This is because the rate of savings will be lower than the inflation resulting in […]
• Problem of China’s Inflation With the increase in oil prices, energy costs have increased, and this has resulted into an increase in the prices of products manufactured in the industries. In 2009 the government made a policy to increase […] We will write a custom essay specifically for you by our professional experts 808 writers online Learn More
• Inflation and Deflation and Their Outcomes That is the money in the hands of the consumers is more causing an increase in the aggregate demand. On the other side, the lender of the money loses some value of the money given […]
• The Relationship Between Money Supply and Inflation It is evidenced that changing the money supply through the central banks leads to a control of the inflationary situations in the same economy.
• Inflation in the United Kingdom According to the Bank of England, inflation occurs when the demand exceeds the ability by the economy’s capacity to produce goods and services.
• Inflation and High-Interest Rates When a company borrows in a country with higher interest rates, the risk of inflation and currency depreciation grows, but the debt of this company is the same.
• The Price Deviations and Inflation Rates As seen from the table, the price deviations and inflation rates vary significantly depending on the item, season, and any global events that affect the economy.
• The Economic Disparity and Inflation It is essential to emphasize that the economic consequences of the pandemic are severe and are due in the main to inflation.
• US Economy: Navigating Debt, Inflation, and Recession Risks Today, the US is the world’s largest debtor and also the largest economy, market, and investor. Household debt can become a severe problem for the economy if exceeds their dead and accumulated wealth.
• Unemployment Rate: Impact on GDP and Inflation In such a way, the scenario shows it is vital to preserve the balance and avoid decisions focusing on only one aspect of the economy.
• The Inflation Dynamics in the Canadian Context According to the report, the economy only functions well when inflation is stable and predictable and is in an unhealthy state otherwise.inflation has been stable in the country over the last 25 years because of […]
• “Expected and Realized Inflation…” by Binder & Kamdar At the same time, the key focus of adaptive expectations is on the past rates of realized inflation and the factors that caused it.
• Inflation at the International Monetary Fund Anchoring inflation expectations, which is a condition in which inflation is regarded near the Central Bank target and typically matches what consumers anticipate, is one of the other possible measures. The pandemic appears to be […]
• How the Federal Reserve Controls Inflation According to the author of the article, the crisis became the impetus for developing new strategies for controlling the level of inflation.
• Inflation: Types and Negative Effects The mentioned type of inflation can stimulate the economy and increase demand for jobs, but at the same time, it raises the prices and is usually more expensive than cost-push inflation.
• Fiscal Policy and Inflation in Canada According to the report, in order to protect the country from the long-lasting consequences of the COVID-19 pandemic and the recently emerged effects of the Russian-Ukraine war, Canadian policy-makers implemented fiscal policies, but their efficacy […]
• Walmart Has Been Negatively Impacted by Inflation The employment issues caused by the pandemic and increased prices for goods handling forced the company to consider the option of automation for business processes.
• “Inflation Hits the Fastest Pace Since 1981, at 8.5% Through March” by Koeze Further on, the predictions reveal that the inflation rate is expected to stabilize due to a decrease in the price of used cars and apparel.
• Inflation Rates and the Value of the Dollar Projected Social Security benefits at the retirement age of 65 years are 48,580 The current age is 25 years Retirement age is 65 years =40 years The annual inflation rate is at 3% Utilizing the […]
• Inflation’s Impact on Fixed Income By taking a diversified approach to fixed income investing, investors can better manage the risks associated with interest rates as well as inflation and increase the yield in their bond portfolios.
• How Economic Crises Affect Inflation Beliefs A feature of the article is the study by the authors of the consequences of inflationary crises and comparison with pre-existing crises to calculate the level of the crisis as a whole.
• Inflation: What Is It and Inflation in the USA Inflation is an increase in the general price level of goods, works, and services of the country’s population and businesses or an extended period. This kind of inflation is considered the best because it occurs […]
• Inflation Crisis in China for Financial Managers As a financial manager running my company, the rise in prices of commodities will decrease the purchasing power of the foreign currency used by investors and potential customers across the globe.
• Unemployment and Inflation Relation However, the level of unemployment and its prevailing types can differ significantly depending on the state of the economies of countries and the policies they use to combat unemployment.
• Unanticipated and Participated Inflation The first inflation outcome refers to income recipients hurt by inflation as there is a forcible price level increase that does not coincide with their income increase proportionally.
• Interest Rate and Inflation Impact on Exchange Rate The second observation point to be made pertains to the differences in the exchange rate of NZDUSD among the two viable.
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• Fluctuations in Inflation and Employment Debate surrounded what is termed the multiplier effect: are they higher for tax cuts or government spending, the differences in multiplier effect from different tax cuts, Incentive impact from tax cuts.
• Inflation in the 1970s In such a case, the reduced injections into the circular flow of the economy trim down the demand, which reduces inflation, and the general growth of the economy reduces significantly.
• Inflation Causes: Structuralism and Monetarism One of the features of this kind of inflation is a rapid rise in the price level with the currency loosing its value.
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• China Currency Policy and Inflation The sphere of inflation in China relates to the consumer price index which has recorded a rising orientation in the near past.
• Current News of Economics: The Global Inflation Inflation has affected the total demand for goods and services in the economy, thus exceeding the supply. This means that you would have to pay more for the same amount of goods and services you […]
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• Chicago (A-D)
• Chicago (N-B)

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How to Write About Inflation

Daniella flores.

• March 8, 2022
• Blogging and Podcasting

Ugh, inflation.

If you’re anything like me, you cringe at the sight of the word. To me, it means things are getting more expensive and who loves that? No one, especially not my budget .

It’s 2022, we’re entering the 3rd year of a global pandemic, and inflation is the highest since 1982 according to Trading Economics .

You can watch all the news channels, read all the financial news articles, or even talk to your angry uncle about how inflation is out of control because “Uncle Sam is screwing us again”, but after all of that you are left pretty clueless to what it even is and how it might be affecting your own life.

As we dive into how to write about inflation, let’s get clear on what exactly inflation is, what causes it, how it affects you, and who is profiting from all of it.

What is Inflation?

Inflation is a measure of the rate of rising prices of the goods and services in an economy. When prices rise, the purchasing power of your money decreases.

The purchasing power of our dollar goes down because we have to use more dollars to meet those rising prices. Ultimately, the less we are able to purchase with our dollars the more inflation rises.

What Causes Inflation?

There are several factors that can drive prices upward in an economy. Typically, inflation can result from an increase in production costs or an increase in demand for products and services.

Some of the various factors that drive inflation include:

• Cost-push inflation: When production costs increase due to increase in raw materials or wages, prices for those products or services increase.
• Demand-pull inflation: When there is a strong consumer demand for a product or service, the prices will increase.
• The housing market: When the demand for housing increases, home prices will rise.
• Expansionary fiscal policy: Fiscal policy is how the government adjusts its spending and tax rates to monitor and influence the economy.

How to Write About Inflation?

When writing about inflation, you have to know your audience and who you’re talking to. Inflation has several nuances of impact depending on the sector and personal experience.

It’s best to simplify it down as much as you can when talking to your audience and do so without bias.

To break inflation down in terms that a 5 year old can understand, I spoke with someone who is much more qualified and experienced on the subject, Jonathan Thomas M.B.A., who is a Financial Coach and the host of Money Talks , a YouTube channel that helps folks to turn their financial goals into day to day decisions.

Jonathan simplifies inflation as “Inflation means everything costs more to produce. When I was a kid a cheeseburger cost me 50 cents at McDonald’s. Every year the cost rose on food like bread, meat, cheese, etc. Because the cost to make a cheeseburger went up, McDonald’s had to raise the price. Now a cheeseburger costs $1.59.”

Give Examples in Your Writing, Especially for Those More Complicated Experiences of Inflation

When talking about inflation, it’s best to pair examples and analogies like Jonathan did to help the reader better understand it, how it affects them, and how it might affect those around them.

For instance, an example from my own life is the experience of the rise of housing costs from one end of the country to the other during the height of Covid-19 in 2020 which could illustrate a more complex form of inflation.

My wife and I moved across the country in December 2020 after we both became location independent, meaning we could work from anywhere. We weren’t the only people that did this in the last couple of years.

In fact, 15.9 million people had already moved by the time we did and their decision to move was influenced by the pandemic in one way or another. Some of those people had to move because of rising rent costs and other financial reasons like job loss. Others feared getting Covid-19 where they lived or wanted to move to be closer to family.

This drove the price of housing up and fast.

We moved from St. Louis, Missouri where the housing prices are below the national average, to a small town in Washington state where the housing is much higher. We went from a $100k house to almost a $300k house.

Our real estate broker explained that because so many people in the larger cities were moving to rural areas like the one we were moving to, this sort of mass migration drove the demand for housing up.

At the same time with increasing demand, there was a smaller inventory of affordable housing available and few new building projects for that same category of affordable housing in the area. This created a seller’s market with bidding wars on new available listings sometimes starting as soon as the house was listed.

Folks were buying houses without ever looking at them, waiving inspections, and due to bidding wars would offer sometimes as much as $50k over asking price for the same house you’d find in St. Louis, MO for $200k less.

Jonathan explains that a part of this equation is “Demand increased for real estate so the cost of lumber increased as there wasn’t enough available for everyone to keep building.”

The other part includes the Federal Reserve’s influence on interest rates that kept mortgage rates low during this time as well, surging that housing demand even higher as it meant American’s could secure mortgages at the lowest interest rate in history in December 2020 – 2.68%.

Framing Inflation as Good or Bad

Inflation can be both good and bad. However, how you write about inflation must take into account your reader’s experience with their current financial situation and how inflation might be impacting that experience.

For instance, if you say inflation is good because it means people can make more money and their assets can build wealth quicker, your reader may not resonate with that same perspective.

If your reader had a house in Washington at the height of the seller’s market last year, they would’ve seen that inflation as a good thing for them because it increased the value of their own house. Some folks could sell their house for as much as $500,000 more than what they bought it for.

Then there were folks on the other side of that fence where they were ready to purchase their first home that year, and found nothing they could afford. Or they lost a job and couldn’t afford rent anymore. So, they had to leave their home to move somewhere cheaper to turn around and see the landlord listing their home for half the price after so they could fill the unit with a tenant.

It’s also because of the rate of inflation since then that folks are seeing those same discounted rents, now going back up.

Inflation can be good and bad for everyone. Be mindful of how you frame it to your audience.

Conclusion: How Well Do You Know Your Audience?

When you discuss any sort of financial topic, it is crucial that you know exactly who you’re talking to. People have charged reactions to reading financial content because of how personal and political money is. Charge them up in a positive way, not a negative one.

Start with a simple audience persona which you can use a template like the one found here . Ask yourself what are the most common problems that your audience might have with inflation and then speak to those problems when covering the topic.

If you know your audience, writing about inflation is going to be a breeze.

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Home — Essay Samples — Economics — Inflation — The Rise of Inflation Rate in the Us

The Rise of Inflation Rate in The Us

• Categories: American Government Economic Growth Inflation

About this sample

Words: 1605 |

Published: Jul 15, 2020

Words: 1605 | Pages: 4 | 9 min read

Table of contents

Introduction, financial measures in the us government's inflationary rise, recommedation, what are some factors that contribute to the rise in inflation, how did the inflation affect the market, implementation of additional monetary easing (so-called qe 3), purchase policies of mbs newly decided at fomc in september.

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With Inflation This High, Nobody Knows What a Dollar Is Worth

Strong reactions to rising prices and misunderstandings about the value of money are rampant, our columnist says.

• Share full article

By Jeff Sommer

Jeff Sommer writes Strategies , a weekly column on markets, finance and the economy.

Rising prices have made people grumpy. They have depressed consumer confidence , despite a growing economy and low unemployment.

But exactly how inflation is hurting, helping and confusing people is hard to understand. Everyone knows that the cost of living has increased. Yet unless you’re constantly pulling out a calculator, you’re unlikely to know whether your wages are keeping up with inflation, whether the stock market has actually hit a real peak or whether a lottery jackpot is as sweet as the marketers claim.

There’s a fancy name for the common human failure to see past the gaudy prices largely created by inflation. This widespread inability to recognize what money is really worth is known as money illusion.

Irving Fisher, a Yale economist, wrote a book about it nearly a century ago. John Maynard Keynes , the British economist, popularized the idea. Behavioral economists have studied it extensively. But their insights tend to be forgotten when prices are fairly stable, as they were in the United States until three years ago.

When inflation increases annually at 2 percent or so, who really cares about it? You can function well without thinking about the slowly eroding value of your money — although old-timers notice it because even at a 2 percent annual inflation rate, prices double every 36 years.

But now that we’ve been living with high inflation for a while, everyone is prone to money illusion, to one extent or another.

Consider that a March 2021 dollar is worth less than 85 cents today, according to the government’s Consumer Inflation Index calculator . When I keep that number in my head, the dollars in my bank account look especially unimpressive. (And I’ve been working full-time since the summer of 1977. The calculator says that every dollar I earned in my first job is worth only 19 cents in 2024 money. Yikes!)

Of course, everyone knows by now that the purchasing power of the dollar has dropped. When the price of products you see every day has gone up — a gallon of gasoline, a loaf of bread, a cup of coffee — you know prices have risen.

Even so, it’s easy to slip back into thinking a dollar is simply worth a dollar, and that it always has been.

Stocks and the Lottery

Certain aspects of inflation’s toll on the markets are extensively chronicled — yet, I think, the profound effects of inflation on stocks and bonds are still widely underestimated.

First, a few things about inflation’s costs are clear. Because the Federal Reserve has been fighting inflation, short-term rates are high. And several consecutive months of bad inflation readings have made it unlikely that the Fed will cut rates soon. In the bond market, which responds to the Fed’s signals and to traders’ judgments about inflation and economic growth, yields have surged. As a result of all this, a range of consumer credit rates steepened. These include mortgages, credit cards and personal loans.

In addition, the dawning realization this month that the Fed is in no rush to lower interest rates stalled the stock market.

I wrote about a less well-known aspect of inflation recently. The frequent exuberant references to new peaks in the S&P 500 during the recent bull rally didn’t take rising consumer prices into account. (They used what economists call nominal prices, not real ones.) On an inflation-adjusted basis, the stock market only in March approached a new peak for the first time in years. I relied on an analysis by Robert Shiller, a Yale economist, who has long used inflation-adjusted data to pierce the veil of money illusion. Because of setbacks in the past few weeks — high inflation and a faltering stock market — the market has fallen below peak levels in real terms.

Using nominal returns in an inflationary era can lead you to the erroneous conclusion that market is generating phenomenal returns.

Here’s another product of money illusion, one that state governments are exploiting relentlessly: lottery jackpots. As I wrote in March, a spate of recent huge jackpots have been artificially pumped up by questionable marketing practices, high interest rates and inflation.

When used by skilled marketers, money illusion can make unwary humans so excited that they will pour hard-earned money into chimeras, like lotteries and frothy stock markets.

Unhappy Workers

The old refrain, that the rent is too damn high, is resonating now. Steep housing costs are embedded in government indexes and account for a substantial part of recent official inflation increases.

Wages are another nagging problem. Numerous surveys show that many working people believe their wages haven’t kept up with the cost of living. Whether they actually have kept up is debatable. The official data on average wages is volatile and difficult to interpret.

Meticulous research by the economists David Autor, Annie McGrew and Arindrajit Dube shows that for lower-income people, real wages have risen, erasing nearly 40 percent of the longstanding wage gap between richer and poorer workers in the United States.

Even so, because inflation in essentials like food, housing and transportation stresses lower-income people more acutely than the rich, it’s not clear that those wage increases are well appreciated.

In fact, research by Stefanie Stantcheva, a scholar at Harvard and the Brookings Institution, building on earlier work by Professor Shiller, finds that it’s not.

People tend to blame the government for the pain of inflation, and to give themselves credit for raises they have received — even while feeling angry that those raises don’t seem to be keeping up with the cost of living.

That’s a core issue when inflation is high. “Money Illusion,” a classic 1997 paper by the economists Eldar Shafir and Peter Diamond and the psychologist Amos Tversky, found that in periods of high inflation, employers can get away with giving workers raises that amount to substantial wage cuts on an inflation-adjusted basis.

Say inflation is rising at a 4 percent annual rate, and you get a 2 percent raise. You’ve just received a real wage cut. If there’s no inflation, and your wage is cut by 1 percent, you’ve also gotten a wage cut — but you’ve lost less money than in the case of high inflation. What’s odd is that workers tend to view the bigger real wage cuts as fairer.

This makes sense, the authors say, when you factor in money illusion.

Where We Are Now

At the moment, consumer sentiment surveys are skewing lower than they have in periods that were similar in economic growth and employment. Neale Mahoney and Ryan Cummings , two economists at Stanford, think inflation, and lingering dissatisfaction with price levels, may well be the cause.

Looking back at past periods of high inflation, they have done some rough calculations that show that the negative effects of inflation on consumer sentiment erode 50 percent each year. In other words, they have a half life of about one year.

Professor Mahoney updated the research at my request. In the three years through March, prices rose 17.9 percent. According to his model — and, crucially, assuming the rate of inflation drops immediately to the Fed’s forecast of 2.5 percent annually — there would be an eight percentage point increase in consumer sentiment by November. There happens to be a national election then.

Mr. Mahoney and Mr. Cummings both served in the Biden administration. If they are right — and, if inflation really drops quickly and stays low — the improvement in the national mood could tilt the outcome of the election.

But inflation has defied economists’ prediction efforts over the past few years. I make no assumptions.

Certainly, I hope inflation will fall and it will be safe to live an ordinary life without thinking about money illusion. But it will take a long while for me to unsee the shrinking dollar.

An earlier version of this article misspelled the surname of one of the economists who conducted research on wage trends. She is Annie McGrew, not McGraw.

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Jeff Sommer writes Strategies , a weekly column on markets, finance and the economy. More about Jeff Sommer

Essay on Inflation In Philippines

Students are often asked to write an essay on Inflation In Philippines 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 In Philippines

What is inflation.

Inflation means the prices of things we buy are going up. In the Philippines, when prices rise, it becomes harder for people to afford food, clothes, and other items. This can happen when there’s too much money to spend but not enough goods, or when the cost to make products goes higher.

Inflation in the Philippines

The Philippines often experiences inflation. This can be due to natural disasters affecting crops, changes in global oil prices, or government actions. When inflation occurs, Filipino families might struggle to buy what they need, which can be tough for everyone.

Effects on Daily Life

Because of inflation, families in the Philippines might have to change how they spend money. They may buy less food or cheaper items to save money. Sometimes, even going to school or getting healthcare can become more expensive, making life challenging for many people.

250 Words Essay on Inflation In Philippines

Understanding inflation in the philippines.

Inflation means the increase in prices of things we buy, like food, clothes, and toys. In the Philippines, just like in other countries, prices can go up over time. This can make life hard for families, especially if they don’t have a lot of money.

Causes of Inflation

In the Philippines, inflation can happen for many reasons. Sometimes, if there’s a problem with growing food or if there’s a big storm, there might not be enough of it, and this can make prices go up. Also, if the money in the Philippines becomes less valuable compared to other countries’ money, things that come from other countries can become more expensive.

Effects of Inflation

When prices go up, it’s tough for people. They might not be able to buy as much with their money, and this can be stressful. Parents might have to work more to earn more money, and sometimes, kids might not get new toys or clothes as often.

What the Government Does

The government in the Philippines tries to control inflation. They can change how much money is in the economy or make rules about prices to help keep them from going up too fast. They do this because they want to make sure that people can afford what they need.

Inflation in the Philippines is a challenge that affects everyone. It’s important to understand why it happens and how it changes the way people live. While it can be tough when prices go up, the government works to manage inflation for the good of the country.

500 Words Essay on Inflation In Philippines

Inflation is when the prices of things we buy go up. Imagine you could buy a toy car for one peso last year, but this year the same car costs two pesos. That’s inflation: the money you have buys less than before. This can happen with toys, food, clothes, and almost everything. In the Philippines, like in many countries, inflation affects how people live because they need more money to buy the same things.

Causes of Inflation in the Philippines

In the Philippines, inflation happens for a few reasons. Sometimes, when there are not enough goods like rice or vegetables, prices go up because many people want these items but there aren’t enough for everyone. This is called “demand-pull inflation.” Another reason is “cost-push inflation,” which is when the cost to make products goes up. For example, if the price of gas increases, it costs more to deliver goods to stores, so the prices of these goods go up.

Also, when the money value in the Philippines goes down compared to other countries’ money, things we buy from other countries become more expensive. This is known as “imported inflation.”

Effects of Inflation on People

Inflation can make life hard for families. Parents have to spend more money on the same things, so they might have less money left for saving or for fun activities. Kids might notice that their allowance doesn’t buy as much candy or toys as it used to. If inflation is high, people might worry about prices going up even more and rush to buy things, which can make inflation worse.

How the Government Handles Inflation

The government of the Philippines tries to control inflation to make sure prices don’t rise too fast. The Central Bank of the Philippines can change interest rates, which is like changing the cost of borrowing money. If it’s more expensive to borrow money, people and businesses might spend less, and this can help slow down inflation.

The government can also use policies to help make sure there is enough supply of goods. For example, they can encourage farmers to grow more rice or make it easier for stores to get products from other countries when there’s not enough supply in the Philippines.

What Can People Do?

People can also do things to handle inflation. Families can plan their spending and look for better prices before buying something. It’s important to learn about money and how to use it wisely, especially when prices are going up.

Inflation in the Philippines is when prices rise and money buys less. It can be caused by not enough goods, higher costs to make products, or the country’s money value changing. Inflation affects how people live, but the government and people can take steps to manage it. By understanding what inflation is and how it works, even school students can be better prepared to deal with it in their daily lives.

That’s it! I hope the essay helped you.

If you’re looking for more, here are essays on other interesting topics:

• Essay on Cold War
• Essay on Cold Weather
• Essay on Inequality In Society

Apart from these, you can look at all the essays by clicking here .

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