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Inflation and Government Economic Policies

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Inflation can be defined as the constant increase in the prices of goods and services in an economy.  It may be caused by a number of factors such as when a government prints excess money “paper money” in a bid to deal with a crisis.  The rise in production and labor costs can also aggravate inflation.  This forces the company to pass on the costs to the end users.  National debts and International lending can also cause inflation; this is when the lenders increase the interest rates.  Inflation can also occur when high taxes are imposed on consumer products.

               Though a low level of inflation is normal in Economic Development, it is not desirable in the economy since it brings about demand-pull whereby the high demand pulls up the prices.  It also affects the elderly adults who hope to retire on fixed incomes since the money they will get will have a lesser spending power. High inflation levels also cause unemployment as producers reduce on output amounts.

               There are two significant ways of controlling inflation, i.e. monetary and fiscal measures.  High interest rates by the Central Bank are the most common way of controlling inflation.  Some monetary measures include a Bank Rate Policy, the Cash Reserve Ratio and Open Market Operations where the Central Bank sells government securities to the public.  On the other hand, the fiscal measures may include taxation, government expenditure and public borrowing.

               Consumer Price Index (CPI) refers to a monthly program that produces information on the price changes bore by the urban end-users for a unit of goods and services.  The Consumer Price Index has risen steadily since the economic year 2000, with the rate lower in each preceding year.  This constantly rising trend is mainly due to changes in the prices of food and energy.  The housing sector, health care and education costs have enormously increased causing an increase in the cost of living.

Consumer price index from 2000-2011

               Producer Price Index (PPI) refers to the average changes in the selling prices by the producers on their output over a certain period of time.  Since the year 2000, the PPI shows a constant upward trend, whereby the rates increase in each subsequent year.  Increased costs in the energy sector are the main reasons for this increase.  Also, getting goods from the processing stage for instance commodities like steel, cotton; diesel to the industry level (final stage) of manufacturing can increase the production costs.

Consumer Expenditure Survey (CE) is both a Quarterly Interview Survey and a Diary Survey that is carried out on American consumers to give information on their income, expenditures and their general buying habits.  Since the year 2000, the CE brings out varying information on the amounts and habits of expenditure.  This is because the Consumer Expenditure Survey does not necessarily show the cost of living.  The CE is affected by different economic and demographic conditions as well, for instance age differences, income levels, tastes and preferences, etc.

The current income levels are not sufficient to offset the inflation.  This is because the rate at which the basic commodities are rising at, is larger than the rate at which income is being increased.  Moreover, the other techniques adopted before to increase income are not workable now, like more working hours for men cannot succeed now since most women are working as well .

With the monetary measures in place, future inflation should be pretty stable within just a period of time.  Also, the method of excluding food and energy in the predictions is no longer being used since it provides incomplete statistics. With their inclusion, the expected forecasts are more accurate. Some of the measures adopted by most central banks also have an effect on the economy.  As the central banks hold money so as to adjust interest rates, they affect the prices in goods and services in the economy, but rather indirectly.  Also, decreasing inflation results to a decreased pressure on the currency.

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