Category: Inflation

Introduction

Inflation is an increase in the prices of goods and services in the economy. It is linked to a variety of other economic factors and phenomena, both as a cause and result of inflation. These factors can be quite varied and can result in both negative and positive impacts on the economy.

Governments, usually through their central bank, have various methods to identify and reduce inflation. However, the response is invariably political in nature, primarily because the efforts to lower inflation can sometimes result in a lack of attention to issues such as unemployment.

Additionally, inflation does not target all industries equally. Special attention to inflation made on the part of banks and government entities may insufficiently lower process in one industry, or ignore another sector. Due to the globalized nature of the economy, allowing inflation to continue unchecked can have disastrous consequences, not only to the nation it originates in, but also in nations it is trading with.

Prime example of inflation and poor economic or political responses and its effect throughout the world, is from the most recent recession of 2007-2009. Also known as the Great Recession which is one of the biggest financial crises since the Great Depression of the 1930’s.

What is the principal premise behind inflation targeting?

Inflation targeting is an economic policy where authorities set a monetary goal and shape the policy to match it through the use of interest rates and other budgetary tools. These figures are what dictate the prices of products within the country. Using this form of policy is a secure method in regulating the costs of conducting business.

In other words, the amounts paid out in labor and production remains lower than the value received. In theory inflation targeting is straightforward: the impending rate of inflation is predicted by the central bank, later on it is juxtaposed with the target rates which the government considers as appropriate for the economy and intends to achieve.

The difference between the predicted amount and the goal determines how much monetary policy has to be adjusted (Mishkin, 2001). This type of financial manipulation is meant to avoid a shortage of available goods, as well as to encourage public investing and savings into capital funds such as stocks and bonds in order to maintain the overall money supply.

What evidence indicates that managing the money supply is the principal task of inflation targeting?

Inflation targeting is a method used by the Central Banks in order to control the economy as well as maintain stability in the financial markets. This means the Bank is responsible for keeping a balance between the supply and demand for money.

Taking into account that numerous transactions use currency, there is a significant influence of money on economy of the country. In order to increase the supply of available funds, Banks will reduce interest rates, which encourage investments and also give more buying power to the consumer.

An increased sale on goods persuades corporations to order more materials and increase production. The expansion of business performance requires more employees and influences on the demand for capital goods. The prices are raised with the influence of the situation caused on the stock market in a supple economy.

This in its turn forces companies to deal with debts and equity. If the money supply continues to expand, prices begin to rise and banks will then raise interests’ rates in order to offset the inflation rate. However, if left un-monitored or in the case of the recent recession, reducing interest rates too low will have a disastrous impact on the economy.

Some experts believe this was the main cause of the current downturn; loose lending on the part of the Banks coupled with no-money down loans provoked a rapid rise in the housing market. When this same market crashed, a majority of the loans went into default and with no capital to collect on; Banks were facing real dangers of bankruptcy.

Is there an ideal rate of Inflation?

Ideally inflation rates should be stable at 2 percent per year allowing room for economic growth. Amounts which are over 3 percent or below 1 percent are generally a cause for concern. The United States for example, has experienced low levels of inflation recently due to the sluggish economy following the Great Recession.

Currently the inflation rate is about 2.5 percent of the gross domestic product which is up from the negative 1.3 percent during the recent economic decline (Losman, 2010 & Luojia & Toussaint-Comeau, 2010).

Have monetary policy makers embraced policy initiatives through extensive understanding of these relationships? What does evidence show?

After the recent economical crisis, emergency interventions were implemented in order to rescue many national financial systems. Stimulus plans and major bailouts became a major factor in financial policies. In the United States the “ARRA (The American Recovery and Reinvestment Act of 2009)” (Isidore, 2009), was created in order to take immediate action against the growing crisis.

Its primary objectives include: job creation, investment in infrastructure, education, health and capitalize on the green movement. The estimated cost of the recovery program is over $700 billion (Isidore, 2009) The main principal behind the ARRA is that “…during recessions governments should offset the decrease in private spending in order to save jobs and stop further economic deterioration” (Isidore, 2009).

Despite official statements made by government officials about recent economical stability, the general population remains pessimistic. Falling income, rising unemployment and an increase in energy and food costs, have critics believing the country is still in crisis and possibly facing another recession.

Works Cited

Isidore, Chris. “The Great Recession”. CNNMoney. March 2009. Web. July 2012.

Losman, Danakan.. (2010). “The Rise of Stealth Inflation”. Challenge, 2010. Questia Trusted Online research. Web. July 2012.

Luojia, Hu, & Maude Toussaint-Comeau. “Do Labour market activities help predict inflation?” Economic Perspectives. Questia Trusted Online research. 2010. Web. July 2012.

Mishkin, Frederic S. “Inflation Targeting”. National Bureau of Economic Research. July 2001. Web. July 2012.

Inflation

Inflation is the prolonged increase in the prices of goods and services in a country. Inflation is a result of a rising money supply in the economy. That is the money in the hands of the consumers is more causing an increase in the aggregate demand. The increasing demand has an effect of increasing commodity prices which if not controlled in time, continue to rise causing inflation. Inflation is determined by the use of the consumer price index (CPI) which is the purchasing power of money.

Inflation is an advantage both to the consumers and the government. Firstly inflation brings business growth. People will buy now to avoid an increase in the pieces in the future. The current high purchase of the money held by the consumers will make the business to grow and promote new investments.

Inflation is useful for money borrowers. Somebody borrowing money today will not pay in the future the same value of the money borrowed. Because of a decrease in the money value, the borrower pays less. For example one dollar today will not hold the same value tomorrow. On the other side, the lender of the money loses some value of the money given in the past. Therefore inflation helps in the redistribution of income between the creditors and the sellers.

Inflation improves on the business’s financial stability. The company assets increase in the values due to inflation. The financial sector also benefits through the security brought by debtors when taking loans. In case there the loan is not paid by the debtor, the financial institutions gain more through the appreciated security. Inflation will increase the value of the loan security. Low inflation is useful in reducing the economic recessions therefore favoring the labor market (Mankiw, 2009:189).

Deflation

Deflation is a continuous increase in money value. The purchasing power of money increases over time therefore consumers can get more commodities than in the past for the same amount of money. In a deflationary economy, people tend to save more now and consume in the future.

Deflation results in less spending by the consumer. The little spending reduces the demand for commodities thereby the businesses reduce their production. Also, the expectation of money increase in the future makes the consumer hold back their money for future spending, thereby reducing the aggregate demand in the country.

Deflation increases the future monetary value, therefore the cost of borrowing money increases in the real value in the future. Borrowers suffer by paying more than they borrowed. This lowers the consumers’ attitude toward borrowing thereby reducing the aggregate demand of the country. The reduced demand negatively affects economic growth. High real interest rates increase the cost of repaying borrowed money also interest rates make the consumer decrease the spending (Baumol and Blinder, 2007).

Financial systems may become unstable due to the high debt cost which may make some debtors default loan. The loan cost may seem to be high because of the reduced value of collaterals.

Deflation affects the number of profits the businesses make. This is because of the reduced demand for commodities which also reduces production. Lower production leads to reduced profits that result in low investment and later high unemployment (Tanaka, 2004:418).

References

Baumol W. and Blinder A S. (2007). Macroeconomics: principles and policy. London: Macmillan publishers.

Mankiw, G. (2009). Principals of economics.USA: Lachina publishers.

Tanaka, G. (2004). Digital deflation: The productivity revolution and how it will work. New York: McGraw hill publishers.

Private economies are subject to a variety of fluctuations in inflation and employment. Can the government, through policies termed fiscal or monetary, help to smooth these out or mitigate their negative impact on citizens? Can government help move the economy toward low inflation and high unemployment?

This issue was dramatically demonstrated in 2008 when confidence in financial institutions was badly shaken. To offset the Great Recession, the government passed the Recovery Act, which permitted tax cuts (tax reduction), spending by the Federal government (increasing government purchasing), and assistance to local and state governments (transfer payments).

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.

Tax cuts shift the actual money available to people for purchases – termed disposable income — increases in taxes shifts GDP to the right and down, and vice versa.

The multiplier effect works through the chain of spending – one person’s income is another person’s expenditure. The formula (much simplified) IS 1/ (1-MPC). This probably overstates the multiplier by ignoring variation in imports, price changes, and income taxes.

The book asserts that tax cuts have a smaller multiplier than government spending because there is no assurance that every dollar of a tax cut will be laid out in purchases (or, although this is not mentioned, within the reporting period). If people are remitting a portion of income in taxes (Page 218 seems to be missing).

To shift potential GDP, it is necessary to know or guess at the multiplier, so you know how much the government needs to spend to get the growth that is desired.

In past years, for example, in 1999, the challenge is to reduce aggregate demand, and the procedure was carried out in reverse of the above.

As long as the combination of spending and tax cuts generates the same aggregate demand curve, the outcome will be the same in terms of real GDP and prices. How much emphasis is placed on government spending versus tax cuts ends up depending on political perspective? Conservatives prefer personal actions and spending, while liberals accept government spending and action to accomplish the desired objectives.

The effectiveness of all governmental interventions is impaired by several items. These include changing circumstances, inaccuracy in estimation of the multiplier, and inaccuracy in employment statistics, the long lag time between implementing something and its effect in the economy, and the fact that these changes are being suggested by politicians rather than economic experts (for whatever they are worth!).

Reagan-era economists proposed that supply-side personal income tax cuts would increase working, saving, and making investments back into the economy. This does not always take into account the demand-side effects. People spend more when they have more money. Supply-side policies can increase inequality, and they certainly decrease tax revenues. Also, the timing of impacts may be uncertain and delayed.

Monetary : one way that the government can affect the economy is through interest rates and money supply. The Federal Reserve is largely involved in such policies. This was founded after the economic panic of 1907, in 1914, to prevent a recurrence.

It is intended to operate independently of political pressure, which is why the leadership is appointed for 14 years – long enough to outlast most politicians. However, some accuse it of being undemocratic. Meeting 8 x per year, the Federal Open Market Committee decides what actions to take (or not) to achieve 1.5-2% inflation.

It is important to understand the difference between money and income. Money is measured at one point. Income is received over some time.

The Federal Reserve can increase or decrease the amount banks must keep in reserves, thereby increasing or decreasing the money supply. To lower interest rates, the Fed buys Treasury bills from banks or individuals, and thus increases their money on hand.

The supply curve for bank reserves is upward sloping, and the demand curve is downwards sloping. The demand curve for reserves depends on the demand for transaction deposits, the real GDP, and the price level — interest rate: federal funds rate. The federal funds rate is critical; it is the interest rate charged and paid between banks ( not the public).

It is, with the Treasury Bill rate of return, the only interest rate that the Fed can control. When the Fed purchases T-Bills on the open market, this raises money supply and lowers interest rates. When the Fed sells T-Bills, this reduces the money supply and lowers T-Bill prices. Interest rates on credit cards, loans, mortgages, and corporate bonds balances are out of the Fed’s control. A crisis in the economy occurs when interest rates move at wildly different rates or directions.

Interest rates should reflect the risk of default. They range from T-bills to banks borrowing from banks, to the lending of reserves, to Fortune 500 corporate debt, to smaller or weaker corporate debt (junk bonds). The interest premium for risky borrowers (whether nations or individuals or firms) is spread over various Treasuries. The risk spread widens when the perception of default risk increases, and vice versa.

Executive Summary

Inflation and FDI are two economic factors that have marked influence on the economic growth of a country in the form of GDP. Normally, the performance of multinational enterprises has intricate links with GDP, inflation, and FDI. The study hypothesized that inflation and FDI have different effects on the GDP of developed and developing countries. Thus, the study aimed to establish the influence of inflation and FDI on the GDP of a developed country (Japan), developing country (Mexico), and the world. The study obtained data on inflation, FDI, and GDP (1960-2017) from the World Bank Databank and the United Nations Conference on Trade and Development. SPSS software was used to generate descriptive statistics and perform correlation analysis and regression modeling. Additionally, Tableau was used to visualize trends and patterns of data over time. The findings demonstrated that GDP has a negative relationship with inflation, but it has a positive relationship with FDI. Regression analysis illustrated that inflation and FDI account for 89.5%, 57.5%, and 86.8% of the variation in GDP in Mexico, Japan, and the world respectively. Thus, the study recommends multinational enterprises to consider the effects and trends of inflation and FDI in selecting locations for establishment in developed and developing economies.

Introduction

Introduction and Justification

The gross domestic product (GDP) is one of the main parameters that economists employ in assessing economic growth and development of a country. It reflects the number of goods and services that a country produces in a specific period, usually a year (Alshamsi, Hussin & Azam 2015). As an economic indicator, GDP is sensitive to changes in economic factors at local, national, and international levels. Alomari and Azzam (2017) explain that multinational companies experience different effects of micro- and macro-economic factors because they operate in diverse economic environments. Inflation has negative effects on GDP because it decreases the value of money and reduces the consumption level of goods and services (Svigir & Milos 2017). Additionally, foreign direct investment (FDI) has positive effects on GDP since it creates employment opportunities, promotes the production of goods and services, and increases the purchasing power of individuals (Guechheang & Moolio 2014; Kirti & Prasad 2016; Abbas & Xifeng 2016). In this view, it is apparent that inflation and FDI are economic factors that determine the GDP of a country. Since economic factors vary from one country to another, there is a need to compare the effects of inflation and FDI on a global level, developing countries, and developed countries.

Importance and Research Gaps

In this era of globalization, the understanding of the effect of inflation and foreign direct investment on GDP is important to multinational enterprises and global industries. Although theories elucidate that inflation has a negative influence on GDP, empirical studies have demonstrated the existence of positive and neutral effects (Svigir & Milos 2017). Varied effects of inflation are dependent on the economic stance and characteristics of countries. Inflation has negative effects on GDP in developed countries (Akinsola & Odhiambo 2017), but it has positive effects on GDP in developing countries (Svigir & Milos 2017). The existence of varied effects of inflation and FDI is a research gap that requires elucidation to establish the extent to which they influence GDP in both developing and developed countries.

Report Objectives and Structure

Since the study seeks to compare the effects of inflation and FDI on GDP, it selected Japan and Mexico to represent developed and developing countries respectively. However, Japan and Mexico have almost the same size of the population. Comparatively analysis of the effects of inflation and FDI on the GDP of these countries relative to the global level provides a comprehensive trend of GDP. Therefore, this report examined the literature review, collected secondary data from online databases, performed data analysis, and discussed the findings.

Research Objectives

1. To determine how inflation and FDI influence GDP in Mexico.
2. To determine how inflation and FDI influence GDP in Japan.
3. To determine how inflation and FDI influence GDP at the global level.

Literature Review

Critical Overview of Concept

Numerous economic theories elucidate the complex effects of inflation on economic growth. Fiscal policies that countries make aim to stabilize the inflation rate at low levels and optimize economic growth (Asteriou & Hall 2015; Ahmad, Afzal & Ghani 2016). The quantity theory of money predicts that inflation increases as the quantity of money and the purchasing power of consumers increase (Koti & Bixho 2016). The liquidity preference theory also explains the occurrence of inflation in a country. According to this theory, the preference for liquidity increases the demand for money and increases inflation (Koti & Bixho 2016). Hence, the supply and demand for money determine the inflation rate and subsequently influence economic growth.

The exchange rate theory holds that FDI inflows determine the strength of currencies in the global financial markets (Oppong 2018). Differences in the strengths of currencies explain why developed and developing countries have a dissimilar attraction to FDI. Oppong (2018) asserts that countries with stronger currencies tend to attract low FDI than countries with weaker currencies. Moreover, the internationalization production theory postulates that countries have become part of the global village that is subject to globalization forces (Wen & Lyun 2015). This theory shows that multinational enterprises operate in global markets, which are under the control of complex economic factors.

Owing to the existence of diverse economic factors such as the population, natural resources, economic activities, technology and regulations, inflation, and FDI, GDP varies from one country to another. The classical theory elucidates that a country can perform optimally by utilizing all of its resources to attain real GDP (Eltis 2016). In essence, the theory holds that economic growth is under the mechanism of self-adjustment. According to Say’s Law, an economy of a nation generates GDP that is equivalent to the purchasing ability of individuals based on their income (Akinsola & Odhiambo 2017). An imbalance in the real GDP and the level of income reduces economic growth.

Critical Overview of Empirical Literature

An extensive literature review reveals that the relationship between inflation and economic growth is complex because it varies from one country to another, depending on commercial characteristics (Akinsola & Odhiambo 2017). Although the dominant view is that inflation has a negative effect on economic growth, it has a positive influence in some countries. In their literature review, Akinsola and Odhiambo (2017) observed that inflation seems to support economic growth in developing countries, but tends to decrease the economic growth in the developed countries. Further studies to determine the influence of inflation on GDP confirmed the existence of mixed-effects (Akinsola & Odhiambo 2017; Tahir, Khan & Shah 2015). Regression analysis demonstrated that interest rate and inflation rate account for 32% of the variation in GDP in India (Bhat & Laskar 2016). Svigir and Milos (2017) conducted an empirical study on Austria and Italy and established that inflation has no significant impact on economic growth, particularly in countries that have experienced low inflation rates for the long-term.

In their study to determine factors that influence GDP components in the Indian context, Jain, Nair, and Jain (2015) found out that FDI has a significant influence on economic activities in the manufacturing and service industries. In another study done in Cambodia, Guechheang and Moolio (2014) established that FDI has a statistically significant positive influence on GDP because it has aided in the sustenance of growth rate by 7% for 19 years. FDI creates employment opportunities, reduce unemployment, and promote the purchasing power of consumers, leading to increased consumption of goods and services.

Conceptual Framework

The conceptual framework (Figure 1) depicts the comparative analysis of how the inflation rate and FDI influence the GDP of Mexico, Japan, and the world.

Methodology

Data Collection Strategy

The data collection strategy entailed searching for secondary data in online databases. Secondary data offer data in the form of time series, which allows the determination of descriptive statistics, correlation scrutiny, and regression analysis (Saunders, Lewis & Thornhill 2015). Additionally, Secondary data provide comprehensive information because they span over five decades.

Data Sources and Variables

The inflation, FDI, and GDP are three variables that the study created. The inflation and FDI are independent variables, whereas GDP is the dependent variable of the study. Hence, the study collected data of inflation, FDI, and GDP from the databases of the World Bank and the United Nations Conference on Trade and Development because they contain annual economic data from 1960 to 2017 (World Bank 2018; United Nations Conference on Trade and Development 2018). To enhance the external and internal validity of the findings, the study selected data covering 58 years.

Data Analysis Strategy

The study analyzed data using SPSS software and Tableau because they have numerous functions for visualizing and calculating descriptive and inferential statistics. In the exploratory data analysis to establish patterns and trends of data, the study employed descriptive statistics (Ozdemir 2016). The study then used correlation analysis to determine the strength and the direction of association with the view to predicting causal-relationships (Hellwig 2014). Subsequently, the study employed regression analysis as inferential statistics to determine the significance of inflation and FDI on influencing GDP.

Data Analysis

Descriptive Statistics

Descriptive Statistics of Mexico

Table 1 below depicts descriptive statistics of inflation, FDI, and GDP of Mexico over the past 58 years. Descriptive statistics indicate that Mexico has an inflation mean of 19.81% (SD = 12.61%), FDI mean of $10.39 billion (SD = $12.63 billion) and GDP mean of $434.76 billion (SD = $425.12 billion).

Figure 2 depicts trends of inflation, FDI, and GDP of Mexico over the past 58 years. Inflation declined from about 4% in 1960 to approximately 3% in 2017 with a marked fluctuation in the 1980s. FDI has increased gradually over time from about $2 million to around $30 billion in 2017 with significant fluctuations in the past two decades. GDP also increased gradually from approximately $10 billion in 1960 to about $1.1 trillion in 2017.

Descriptive Statistics of Japan

Descriptive statistics (Table 2) explores trends in Japan’s inflation, FDI, and GDP. These statistics shows that Japan has inflation mean of 3.16% (SD = 4.19%), FDI mean of $4.04 billion (SD = $7.72 billion) and GDP mean of $2.7 trillion (SD = $2.1trillion)

Figure 3 below depicts trends of inflation, FDI, and GDP in Japan. Since 1960, inflation rates have declined gradually from 3.5% to the current rate of about 1.3%. FDI increased from $1.6 billion in 1960 to $18billion in 2017. GDP has increased from $44.3 billion in 1960 to $4.87 trillion in 2017.

Descriptive Statistics of the World

Table 3 indicates descriptive statistics of inflation, FDI, and GDP across the world from 1960 to 2017. The inflation mean of 7.12% (SD = 3.26%), FDI mean of $640 billion (SD = $876.63 billion), GDP mean of $27.02 trillion (SD = $25.29 trillion).

Inferential Statistics

Correlation Analyses

Correlation analysis (Table 4) shows that inflation has a moderate negative relationship with GDP in Mexico that is statistically significant (r = -0.304, p = 0.020). In contrast, FDI has a statistically significant and very strong positive relationship with GDP in Mexico (r = 0.946, p = 0.000).

Table 5 indicates that inflation has a strong negative association with GDP in Japan, which is statistically significant (r = 0.703, p = 0.000). Contrastingly, FDI has a moderate positive correlation with GDP in Japan that is statistically significant (r = 0.512, p = 0.000).

Correlation analysis (Table 6) depicts that inflation has a strong negative relationship that is statistically significant with the GDP of the world (r = 0.707, p = 0.000). In contrast, FDI has a very strong positive relationship with GDP, which is statistically significant (r = 0.925, p = 0.000).

Regression Analyses

Regression analysis (Table 7) shows that Inflation and FDI have a very strong positive relationship with GDP (R = 0.946). Inflation and FDI account for 89.5% of the variation in GDP in Mexico (R² = 0.895).

The regression model (Table 8) is statistically significant in predicting the influence of inflation and FDI on GDP in Mexico, F(2,5) = 235.3, p = 0.000.

Coefficients’ table (Table 9) indicates that inflation is a statistically insignificant predictor of GDP (β = $78.48 million, p = 0.909), whereas FDI is a statistically significant predictor of GDP (β = $31.898, p = 0.000). This prediction means that a unit increase in inflation causes GDP to increase by 78.48 million, while a unit increase in FDI makes GDP to increase by $31.898 in Mexico. The regression equation of the model is that: GDP = $78.48 million (Inflation) + $31.898 (FDI) + $101.88 trillion

Table 10 shows that Japan’s inflation and FDI have a strong positive relationship with GDP (R = 0.759). Inflation and FDI collectively explain 57.5% of the variation in GDP in Japan (R² = 0.575).

The regression model (Table 9) is statistically significant in predicting the effect of inflation and FDI on GDP in Japan, F(2,5) = 37.2, p = 0.000.

Regression coefficients (Table 12) shows that both inflation (β = $301.177 trillion, p = 0.000) and FDI (β = $83.1, p = 0.002) are statistically significant predictors of GDP in Japan. The coefficients mean that an increase in inflation by a unit results in the increase of GDP by $301.177 trillion, whereas a unit increase in FDI causes GDP to increase by $83.1. Therefore, the regression equation is:

GDP = $301.177 trillion (Inflation) + $83.1(FDI) + $3.323 trillion

Regression analysis of the global data (Table 13) shows that inflation and FDI have a very strong positive association (R = 0.932). Inflation and FDI explain 86.8% of the variation in the GDP of the world (R² = 0.868).

The regression model (Table 14) is statistically significant in predicting the influence inflation and FDI on global GDP, F(2,5) = 181.5, p = 0.000.

Regression coefficients (Table 15) depicts that inflation (β = $1.22 trillion, p = 0.000) and FDI (β = $23.647, p = 0.021) are statistically significant predictors of GDP across the world. Essentially, GDP increases by 1.22 trillion when the inflation rate increases by a percent, while GDP rises by $23.647 when FDI increases by a unit. Thus, the regression equation of the model is:

GDP = $1.22 trillion (Inflation) + $23.647 (FDI) + $20.528 trillion

Findings and Conclusion

Descriptive statistics indicate that Mexico has the highest inflation rate (M = 19.81), followed by the world (M = 7.12%) and Japan (M = 3.16%). Mexico have attracted more FDI (M = $10.39 billion) than Japan (M = $4.04 billion). However, as Japan is a developed economy, it has generated more GPD (M = $2.7 trillion) than Mexico (M = $34.76 billion). Correlation analysis reveals that while GDP has a negative relationship with inflation, it has a positive relationship with GDP. These findings are in line with the study performed in Nigeria, a developing country (Anidiobu, Okolie & Oleka 2018). Comparatively, the relationship between inflation and GDP is stronger in Japan than in Mexico, whereas the relationship between FDI and GDP is stronger in Mexico than in Japan. Developed countries are less attractive to FDI than developing countries because they have sufficient resources to drive their economies (Pandya & Sisombat 2017; Rahman 2014). The relationship between inflation and GDP in Mexico is weaker than that of the world, while the relationship between FDI and GDP of Japan is moderately lower when compared to that of the world.

Regression analysis provided important information regarding the conceptual framework showing the influence of inflation and FDI on the GDP of Mexico, Japan, and the world. In Mexico, although inflation and FDI account for 89.5% of the variation in GDP, only FDI is a statistically significant predictor. Comparatively, the regression analysis of Japan shows that inflation and FDI explain 57.5% of the variation in GDP. Ali and Hussain (2017) found out that inflation has a positive impact on economic growth in Pakistan. Therefore, these findings show that the economic growth of Mexico is more sensitive to the changes in inflation and FDI than that of Japan. On the global scale, inflation and FDI account for 86.8% of the variation in GDP.

The findings of the study demonstrate that inflation and FDI have a statistically significant influence on GDP. Comparative analysis of Mexico, Japan, and the world shows that the influence of inflation and FDI on GDP varies from one country to another, depending on macro- and micro-economic factors. These findings are important to multinational enterprises for it would enable them to establish in developed and developing countries. Given that inflation and FDI influence the establishment of multinational enterprises, understanding of macro- and micro-economic factors is necessary.

References

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World Bank 2018, Countries and economies, Web.

Introduction

The relationship between output and inflation was built by the Keynesian. He stated that the fluctuations in output arise from the changes in the nominal aggregate demand. Further, changes in the nominal aggregate demand have a real effect on the economy. The study further revealed that shocks in the economy have a real effect on the prices since an increase in the rate of inflation will make firms to change prices. Nominal shocks in the study are of significance because prices and nominal wages are partially rigid. Thus, it can be observed that shocks in the economy such as changes in aggregate demand have a real effect on the output level and the price level in the economy. This relationship leads to the creation of the Phillips curve. This analytical treatise reviews the theory behind the relationship between the output and inflation in the Philip’s curve.

Objectives of the paper

This paper attempts to carry out a study of the relationship between the volatility of inflation and output across various countries. Further, the paper will discuss how the results of Lucas (1973) relate with the work. The paper will also give a time series plot and scatter diagram to show the relationship between various variables for various countries (Lucas, 1973).

Literature Review

According to Benigno and Ricci (2011), rigidities within the downward nominal wages will trigger aggregate and idiosyncratic shocks for wage setters. The authors derived a Phillips curve for the long run interaction between average inflation wage and average output (Benigno and Ricci, 2011). The authors observed that the long run curve assumes a flatter shape at inflation level that is low, and assumes a vertical shape at inflation level that is high. As a variation of the market labor mobility, efficiency in ‘allocative’ contributors is significant in balancing the distribution of labor units between low and high employment values as part of the wage differential matrix. Reflectively, Benigno and Ricci (2011) argue that the value of marginal product determines the regulatory effect on perfect competition and wage differential at different inflation levels.

The two components will swing until the regulator balances for employments sharing self efficiency on ‘allocativeness’ as part of the wage differential (Benigno and Ricci, 2011). However, Benigno and Ricci (2011) further noted that this interaction holds in a labor market with perfect knowledge of all determinant variables operating in a similar employment industry (Benigno and Ricci, 2011). Due to similar experience, skills, and educational attainment, the wage rates are likely to balance as the regulator moderates the two determining variables in a constant mobility parameter within a definite nominal rigidity.

Benigno and Ricci (2011) explain the relationship between average wage inflation and average output by the hedonic theory of wages to classify this form of interaction between workers that have wage preference variances when interacted with ideal job amenities of nonwage nature (Benigno and Ricci, 2011). The most likely effect would be the standard labor market’s inability to churn wage differentials that are sustainable for employees sharing similar capital stocks of human nature and counterparts with varying capital stocks of human nature. As a result, wage differential is skewed towards market demand within an inflation parameter. Reflectively, the variables interacting within the parameters of this interaction are inflation and output within the normal indifference curve. Consequently, the resulting interaction becomes flexible to different bundles of budget constraints that might be present at each level of computation.

Lucas (1973) offers a comprehensive analysis of the relationship between the real inflation-output tradeoff through an empirical study capturing eighteen economies within a period of two decades. Confirming the null hypothesis that the “average real output levels are invariant under changes in the time pattern of the rate of inflation” (Lucas, 1973, p. 326), the Lucas concluded that there is a determinate rate of output within a level of inflation. In the findings, Lucas (1973) concluded that the there is a direct relationship and variance in the tradeoff between full employment and inflation rate at a particular level of input in the countries studied.

The main assumption adopted in undertaking this empirical study is that “the aggregate price-quantify observations are viewed as intersection points of an aggregate demand and an aggregate supply schedule” (Lucas, 1973, p. 326). Reflectively, this empirical study revealed the relative trend of interaction between output and inflation rate that adjust in the same parameter. Basically, as indicated in the Phillips curve derived by Lucas, it is apparent that structural aspects of the economy often instigate the tradeoff scenario which is independent of the pursued demand policy. Thus, Lucas (1973) confirmed that “the higher the variance of demand, the more unfavorable are the terms of the Phillips tradeoff curve” (Lucas, 1973, p. 334).

From the above reflection, the literature by Lucas (1973) and Benigno and Ricci (2011) indicate a direct relationship between the aggregate output and inflation level for different interacting variables in the Phillips curve. Specifically, Benigno and Ricci (2011) identify rigidities within the downward nominal wages as triggering the aggregate and idiosyncratic shocks for wage setters in the tradeoff interaction between output level and the rate of inflation (Benigno and Ricci, 2011). On the other hand, Lucas (1973) confirms the hypothesis that higher demand variance results in higher unfavorable tradeoff variable within the Phillips curve (Lucas, 1973).

Economic theories

The Philips curve shows the negative relationship between unemployment and inflation (Ball, et al., 1988). The rate of unemployment changes as the aggregate demand and output level changes. An increase in output level results in a decrease in unemployment rate. The research analysis carried out by Lucas (1973) revealed that “inflation and output moves in the same direction” (Lucas, 1973). In other words, the study revealed that inflation and unemployment move in opposite direction hence the Phillips curve. His study further revealed that “countries with highly variable aggregate demand curve have steep Phillip curve”(Lucas, 1973). This implies that random nominal shocks in these countries have dismal effects on the output level in their economy. The relationship between unemployment and inflation is further supported by Okun’s Law. It states that an increase in the unemployment rate by one point will result in a negative growth in the real GDP by two percentage points (Benigno and Ricci, 2011). Based on the labor demand and supply model, unemployment level caused by recession creates disequilibrium in the labor market, that is, there is surplus labor supply with a corresponding low demand as was seen during the 2009 global economic recession.

Data and scatter plots

Data on inflation and output will be collected for a total of eighteen countries. The data will be for a period between 1980 and 2012. The output of the eighteen countries is measured in US dollars for ease of comparison while inflation is measured using the average consumer price index.

Scatter plot diagram showing the relationship between average inflation and the variance in inflation for the countries

The table presented below gives the data for the average inflation and variance in inflation for the eighteen countries.

The scatter diagram showing the relationship between the two countries is illustrated below.

The plot shows that the changes in the inflation rate in some countries are instigated by volatility in the inflation rate. Generally, it can be observed countries that have high volatility in the rate of inflation have a low average inflation rate.

Time series plot of inflation rate over time in the US, UK, and Venezuela

The graph will show the trend of inflation rate in these countries. It gives an indication as to whether the inflation rate has been increasing over time. The time graph plot of the inflation rate for the three countries is illustrated below.

It can be observed that the rate of inflation for United Kingdom and United States increases at a steady rate. However, the inflation rate in Venezuela is quite erratic and from 2003. The value increased at a high rate. The trend of the inflation rate determines the slope of the Phillips curves as mentioned above.

Scatter plot diagram showing the relationship between inflation and output volatility using the whole sample.

The table presented below gives the data for average inflation rate and volatility in output for the eighteen countries between 1980 and 2012.

The graph drawn should give a linear relationship between average inflation and volatility in output. Countries with low volatility will fall within the line of best fit while countries with high volatility such as the United States will fall away from the line of best fit.

Comparison of the results and the related topic

Thus, it can be observed that the results of the graph are consistent with the various economic theories discussed above. There exists a positive relationship between inflation and output. Besides, unfavorable tradeoff variables in the Phillips curve are triggered by higher demand variance. The trend of the inflation rate determines the slope of the Phillips curve. Thus, it can be observed that shocks in the economy such as changes in aggregate demand have a real effect on the output level and the price level in the economy. This relationship leads to the creation of the Phillips curve.

References

Ball, L., Mankiw, G., & Romer, D. (1988). The New Keynesian Economics and the output inflation trade- off. Brookings Papers on Economic Activity, 1(1), 1 – 82.

Benigno, P., & Ricci, L. (2011). The inflation-output trade-off with downward wage rigidities. American Economic Review, American Economic Association, 101(4), 1436-1466.

Lucas, R. (1973). Some international evidence on the output-inflation tradeoff. American Economic Review, 63(3), 326-334.

Introduction

In a review conducted by the Federal Reserve Bank of St. Louis in 2005, it was noted that the economic hero of the inflationary decades was the then chairman of the Fed, Paul Volcker. In the review, Allan Meltzer recognizes some mistakes and policy errors. Both political and economic factors that led to the Great Inflation are identified and scrutinized. It was found out that policy errors were based on the limited independence of the Federal Reserve. Misinterpretation of the apparently flawed economic theories resulted to fruitless policy deliberations and had an impact on the increased inflation rates. It was through Volcker’s new policy of inflation targeting that the inflation was controlled and sustained.

The FOMC (Federal Open Market Committee) were slow in their response to the great inflation. This allowed the growth of inflation rates until it was out of control. Reasons for the 1979 monetary policy reform and how it was implemented have been analyzed in the review (Meltzer 18). The success of the reform is apparent over the past two decades characterized with higher degrees of price stability. The main principle behind the monetary policy reform was the control of the U.S money supply. Lindsey’s article splits the reform into five sections: how it happened, why it happened, challenges facing the FOMC, analysis of the then chairman Paul Volcker and finally the conclusion. Lindsey presented the historical description of the reform, reasons for the adoption, mechanisms of handling various challenges and tries to describe the economist Paul Volcker (Lindsey et al. 6).

Lessons for Monetary Policy

Several lessons have been learnt from the great inflation era. Personnel who have benefited from such lessons include policy makers, politicians and the public in general. The main lesson learnt from the high-inflation era is that low and stable inflation has considerable more economic benefits than high inflation. In the past two decades, substantial economic improvements have been recorded as a result of low inflation. Improvements such as a fall in economic volatility, economic growth and increased productivity have been recognized (Bernanke et al. 11). Bullard provides the following three lessons for monetary policy from the panic of 2008: lender of last resort on a grand scale, the several faces of monetary policy and the asset price bubbles. The Federal Reserve acts as the lender of last resort. Its ability to act in such a way was very innovative. It has proved to be more powerful and flexible than was previously held and has regained the confidence and support of the public. Apart from interest rate adjustment, monetary policy can also be sustained by other dimensions. Policy makers have learned better and sophisticated ways of responding to asset bubbles. Challenges were met in the recent crisis but an opportunity arose for evaluation of responses and the impacts of such responses.

The macroeconomic effects of inflation targeting

Over the past two decades, there is little or no evidence of the effects of inflation targeting on macroeconomics. A study by Bernanke et al. showed no significant short run gains in countries which had adopted inflation targeting (12). Macroeconomic elements include: balance of trade, the Gross Domestic Product (GDP) and the levels of employment. In general, there are two models of macroeconomics: the Classical model and the Keynesian model. The former is concerned with wage rates while the latter concentrates on both long term and short term interest rates.

Inflation Targeting and Optimal Monetary Policy

Features of inflation targeting include: a public announcement, a target which should strictly be adhered to and transparency. Inflation targeting has become very popular in emerging economies. Inflation targeting helps the central bank meet the objectives of monetary policy as well as promoting public understanding of the monetary policy. The theory of optimal monetary policy suggests that inflation is best at low and stable levels. A forecast of future inflation is relevant to the implementation of the optimal policy. Forecasts are done in decision cycles normally on a quarterly basis. Woodford argues for the history dependent target criterion as opposed to the common forward-looking criterion. He points out that targets based on past events handle the zero lower bound more effectively than the forward looking alternative.

He gives the example of the problem facing the Bank of Japan, which depends purely on the forward looking method. Currently, inflation targeting represents one of the greatest innovative achievements as shown by practices in banks such as the bank of Canada and the Bank of England. This has protected many central banks from the discretionary trap and improved the effectiveness of the policy (Woodford 27). As much as evidence for forward-looking is overwhelming, a backward-looking trend should not be ignored. According to Woodford, Policy makers should incorporate both backward-looking and forward-looking elements. The FOMC has explicitly indicated the level of inflation target; they intend to keep it close to zero for a long period.

Forecasting Inflation and Growth

Such forecasts have been under attacks from economics who do not agree with the policy. William Poole, the president of the Federal Reserve Bank of St. Louis is such an economist who tries to challenge the validity and reliability of the forecasts. He favors concentrating on the impacts of forecast surprises over the implementation of economic forecasts. A study conducted on the accuracy of these economic forecasts established that the accuracy declines as the forecasting horizon is extended. The inaccuracy of the forecasts (forecast error) was observed in the 2000 blue chip consensus, which missed the 2001 recession. On average, all forecasts predicted inflation rates which were higher than the actual inflation. Since 1994, the FOMC consensus has been better than the Blue Chip consensus in forecasting. In the 90s, inflation rates have been lower than what was forecasted. Forecast errors exist and pose a great financial risk. Therefore, policy makers should make informed decisions and should be ready for forecast changes (Poole 4).

Conclusion

To the majority, the Federal Reserve made the right move against the inflation problem. The policy change made in 1979 was the right choice. Some even consider the Federal Reserve as the Central Bank to the world. Though the Fed has been successful in many occurrences, they have a duty to provide for consultations and exhibit transparency. It is crucial that the Fed should never allow or encourage such inflation bursts in the future. In my view of point, I believe inflation targeting works and I support IT as a framework for the management of monetary policy in the United States. I have great confidence that IT will prevent a replay of the Great Recession.

Works Cited

Bernanke, Ben. Blinder Alan and McCallum Bennett. What Have We Learned Since October 1979? St. Louis Federal Reserve Bank Review, 2005. Print.

Lindsey, David, Athanasios Orphanides, and Robert Rasche. The Reform of October 1979: How It Happened and Why. Federal Reserve Bank of St. Louis Review, 2005. Print.

Meltzer, Allan. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review, 2005. Print.

Poole, William. “Best Guesses and Surprises,” Review Federal Reserve Bank of St. Louis, 2004. Print.

Woodford, Michael. “Inflation Targeting and Optimal Monetary Policy”, Review, Federal Reserve Bank of St. Louis, 2004. Print.

Inflation is a price increase at a rate greater than expected (unanticipated inflation) or at the expected rate (anticipated inflation). Inflation is an economic phenomenon that influences income recipients in two directions. 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. The second inflation outcome refers to recipients with flexible income, and they might benefit from the inflation effect.

Groups of Recipients Hurt by Inflation

Fixed-income recipients and savers are badly affected by the inflation effect, as their income or company revenue falls when a price level soars. People whose income systems are based on a fixed payment schedule might see a decrease in their purchasing power. The amount of money these people earn does not correspond to the inflation rate. For this very reason, this category of people might be hurt by inflation. Unanticipated inflation hurts lenders, as their purchasing power goes down in case prices go up. If the price level increases, the borrowed money is less valuable than those obtained from a creditor.

Groups of Recipients are Helped by Inflation

Flexible-income receivers are individuals who obtain their extra income from Social Security, an institute that is not affected by inflation, as all Social Security payments are indexed to the CPI. The nominal income increases when the CPI increases automatically, thus preventing the negative inflation impact. Debtors are also less vulnerable to inflation, as they take this phenomenon to their advantage by increasing the money value of lent money.

The Impact of Cost-push Inflation

As the economic crisis hit several facilities, overall production costs were drastically increased, thus generating cost-push inflation. In this situation, firms produce less output, as prices rise. As a result, the highest unemployment rate and little productive efficiency are seen. Cost-push inflation is a form of unanticipated inflation that is in charge of distribution outputs and incomes, as it generates price increases by restricting supply and reducing real output.

Demand-Pull Inflation and Real Output

The case for Zero Inflation might reduce real output, as businesses and organizations spend a lot of time obtaining the needed information, they long to distribute their wages, interest rates, and gain understanding between two concepts, such as nominal and real prices. Economists are determined that inflation is a pitfall for prosperous company development, even if it comes to mild inflation. As to the case of Mild Inflation, economists are sure that mild inflation is a side-effect of strong spending, as strong spending creates high profits and company incentives to enhance its business.

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. In this process, for the same amount of money after a certain time, it will be likely to buy fewer goods and services than earlier. In this case, it can be said that the purchasing power of money has decreased over the past time (Rudd, 2021). Therefore, money has depreciated; that is, it has lost some of its actual value. Inflation should be distinguished from price hikes because it is a long-term, sustained process (Mackevičius et al., 2018). Inflation does not mean an increase in all prices in the economy because the costs of individual goods and services can go up, down, or remain unchanged. It is crucial that the overall price level in the country changes.

With moderate inflation, prices rise no more than 10% a year. The value of money is preserved, contracts are signed at nominal prices. This kind of inflation is considered the best because it occurs due to the renewal of the range (Durguti et al., 2021). It allows for price adjustments due to changes in supply and demand conditions. In addition, in this form, this economic phenomenon is manageable. In October, for example, inflation will rise to 4.1% on an annualized basis throughout the euro area, compared to 3.4% in September (Eurostat, 2021). However, despite the sharp rise in inflation, the European Central Bank is not ready to cancel the stimulus measures adopted in connection with the recession caused by the pandemic (Eurostat, 2021). Higher food prices are the most visible manifestation of inflation for Europeans, which they can easily trace. It should be borne in mind that there is always the danger of moderate inflation turning into more dangerous types of inflation, so it must be kept under control.

There is a price increase from 10-20 to 50-200% per year with galloping inflation. Currency depreciation in galloping inflation is more rapid than in moderate inflation and less abrupt than in hyperinflation. The main negative feature of galloping inflation is the high risks when entering into contracts with nominal prices. That is why in case of their conclusion, it is necessary to consider the supposed growth of prices or make calculations in another, more stable currency.

From 1917 to 1927, the national income of the United States increased nearly threefold. Conveyor production was mastered, the stock market boomed, speculation grew, and real estate became more expensive. Due to the increase in production, additional money had to be emitted accordingly, and a critical circumstance to consider was that the dollar was then indexed to gold. Before the Great Depression, U.S. gold reserves did not grow as rapidly as the economy (Hetzel, 2017). This circumstance led to hidden inflation, as the government printed new money against a booming economy (Hetzel, 2017). This undermined the dollar’s security in gold, the budget deficit grew, and the Federal Reserve reduced the discount rate (Hetzel, 2017). A situation has arisen where the productivity growth in the industry has decreased. At the same time, the amount of pseudo-money has increased, which characterizes galloping inflation.

Hyperinflation causes prices to rise over 50% per month and over 100% per year. The welfare of the population deteriorates sharply, economic relations between enterprises are destroyed (St. Onge, 2017). Such inflation is uncontrollable and requires emergency measures on the part of the state (St. Onge, 2017). As a result of this process, production stops, sales of goods, products, works, and services decrease. Moreover, the actual volume of national production decreases, unemployment grows, existing enterprises close, the bankruptcy of companies occurs. In this situation, the most likely prognosis is a complete collapse of the monetary and commodity system and the transition to a natural exchange.

The first national currency collapse occurred in America during the War of Independence in 1775-1783. The second burst of hyperinflation occurred in 1861 because the Confederate States of America issued huge amounts of extra banknotes to finance the fight against the North (Inflation Data, 2019). Holders of such money were subsequently required to replace them with government bonds. During this period, the term inflation first began to be used in relation to money circulation when a considerable mass of greenbacks was issued.

Inflation can have both positive and negative effects on social and economic processes. For example, inflation has a stimulating impact on trade turnover, as the expectation of rising prices in the future encourages consumers to buy goods today. In addition, under conditions of inflationary development of the economy, weak enterprises go bankrupt. Thus, only the strongest and most efficient companies remain in the national economy. However, the problems of money emission and the depreciation of securities are also aggravated. Inflation can cause a decrease in the volume of goods produced domestically and a decrease in the value of the national currency. There are numerous examples of different types of inflation in history, and every country in the world, not just the United States, has faced this phenomenon. Knowledge of economic laws allows leaders to predict and prevent inflation in a country.

References

Durguti, E., Tmava, Q., Demiri-Kunoviku, F., & Krasniqi, E. (2021) Panel estimating effects of macroeconomic determinants on inflation: Evidence of Western Balkan.Cogent Economics & Finance, 9(1), 1-13. Web.

Eurostat. (2021). Annual inflation up to 4.1% in the euro area.Web.

Hetzel, R. L. (2017. The evolution of U. S. monetary policy. Federal Reserve Bank of Richmond. Web.

Inflation Data. (2019). Confederate Inflation Rates (1861 – 1865). Web.

Mackevičius, J., Šneidere, R., & Tamulevičienė, D. (2018). The waves of enterprises bankruptcy and the factors that determine them: the case of Latvia and Lithuania.Entrepreneurship and Sustainability Issues, Entrepreneurship and Sustainability Center, 6(1), 100-114. Web.

Rudd, J. B. (2021). Why do we think that inflation expectations matter for inflation?Finance and Economics Discussion Series, 62, 1-25. Web.

St. Onge, P. (2017). How paper money led to the Mongol conquest: Money and the collapse of Song China.The Independent Review, 22(2), 223–243. Web.

China is experiencing a problem with rising inflation rates which are driving up prices globally. Recently, CNN business news has indicated that China’s inflation is getting worse. In October this year, the prices of commodities originating from China industries increased at a high rate, and there are growing indicators that customers are feeling the pinch (Business, 2021). Likewise, China’s National Bureau of Statistics has analyzed that there has been an increase in the PPI to 14% in October from 10% in September this year (Business, 2021). 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.

The inflation problem in China is so rapid that manufacturers are imposing higher prices of various commodities to clients across the globe. Also, supply channels of products have been disrupted due to the continuing COVID-19 pandemic that has resulted in the closure of many physical stores worldwide (Gouda & Saranga, 2020). As a financial manager, the inflation crisis will affect my potential clients from coming to purchase various commodities in both online and physical stores. During the event of an inflation crisis, the company tends to invest and spend more money which in turn leads to a greater inflation crisis.

The public’s panic buying and wild online speculation were spurred by the abrupt warning. Consumer inflation has risen due to rising prices for vegetables and gas. Due to severe rain and high transportation costs, the overall cost of vegetables climbed by 16% in October this year (Business, 2021). Crops have been harmed by extreme weather, and officials have recognized that the cost of traveling between regions may rise as a result of rigorous procedures aimed at preventing COVID-19 outbreaks. The rising costs of vegetables will result in a loss of customers and the cost of borrowing from various investors will be much high. Many employees working in the company will lose their jobs since the company operates at a loss.

As a result of the prolonged energy crisis in China, rising coal mining and processing costs were also a major contributor to producer price inflation. There has been a rise in gasoline and diesel costs to about 30% (Zhang et al., 2020). The world’s second-largest economy is already growing at its slowest pace in a year as a result of energy problems, shipping difficulties, and an emerging housing crisis. Inflationary pressures in the country are causing major havoc worldwide. Rising manufacturer inflation is generating upward pressure on global inflation, given China’s status as a global manufacturing company and its importance to the supply chain network.

As a financial manager running my financial company, the crisis will affect my effective strategies to reduce the workload and the labor the employees undertake at my company. The production capacity will be affected and failure to meet the consumer requirements (Heinrich et al., 2021). The information systems in the company will be decentralized to develop more efficient procedures in the back office.

Adaptation of high-resolution spending visibility will be affected when in charge as a financial manager. The crisis inflation will disallow me to see exactly where money is spent and who is spending it. All subsequent productivity in the company attempts is crushed on this basis (Hunt et al., 2018). It hinders the appropriate amount of accountability throughout the organization, ensuring that all choices are taken with full knowledge of the financial implications. Similarly, the cost of consumption will be greatly increased in both physical stores and online platforms.

The inflation crisis affects the economic growth of a financial company. It poses a negative influence on the overall performance of an organization. The crisis results in the loss of employment to workers and financial resources are wasted. Therefore, financial managers must be alert at all times and ensure that proper management of the resources is well-taken care of. In order for the financial market to keep improving, legislators must push economic legislation to keep inflation rates low and generate economic growth.

References

Business, CNN. (2021). China has a big inflation problem and it’s pushing up prices worldwide. CNN. Web.

Heinrich, J., Henderson, S., Holland, T., & Portanova, M. (2021). 6 Strategies to help your company weather inflation. Harvard Business Review. Web.

Hunt, W., Mara, M., & Nankervis, A. (2018). Hierarchical visibility for virtual reality. Proceedings of the ACM on Computer Graphics and Interactive Techniques, 1(1), 1-18.

Gouda, S. K., & Saranga, H. (2020). Pressure or premium: what works best where? Antecedents and outcomes of sustainable manufacturing practices. International Journal of Production Research, 58(23), 7201-7217.

Zhang, G., Zhang, J., & Xie, T. (2020). A solution to renewable hydrogen economy for fuel cell buses–A case study for Zhangjiakou in North China. International journal of hydrogen energy, 45(29), 14603-14613.

The article under consideration is Inflation Rise Hits US Consumers posted at bbc.co.uk, 29 February 2008. The main focus of the article’s concern is the inflation rise that US economics experiences now and the impact it has on US consumer spending.

It is stated in the article that personal spending rose 0.4% during January 2008 that significantly succeeds the economists’ expectations, whereas “a key gauge of inflation rose 0.4%, with shoppers spending more on food and fuel.” (bbc.co.uk.)

Parkin and Bade suggest the following definition of inflation in their Foundations of Economics:

Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability (12).

In general, inflation is usually seen as an increase in the price of a basket of goods and services that serves as a representative of the economy as a whole.

The graphs below suggest a graphical demonstration of the current US inflation in food and energy.

US economists predict a danger of stagflation in the state. This concept is a neologism of the 1970s formed by combining stagnation with inflation; it implies the situation where the economy is not growing, accompanied by high inflation.

The current situation in the US economy is that it faces “significant inflationary pressures because of record oil prices which have pushed up the price of petrol and heating oil. “ (One-Minute World News) Below is the diagram that characterizes US inflation in general:

However, as the article goes on, Federal Reserve chairman Ben Bernanke states that no stagflation should be expected, instead, oil, metals, and food prices will rise.

The article informs that US economic growth dropped sharply in the last three months of 2007 after spending on new housing collapsed. Here is the situation with US economic growth:

BBS claims that

In the past few years, the US economy has been growing strongly. But recent troubles in the housing and credit markets have hit the economy hard, with growth slowing sharply at the end of 2007. Economic forecasts suggest that the US growth in 2008 could be cut by half to about 1.5% (One-Minute World News).

Freddie Mac and Fannie Mae which deal with mortgage lenders to help people get lower housing costs and better access to home financing (and guarantee about 45 % of US mortgages) report huge net losses for 2007 and forecast further bad news because of the increase of the glut of unsold homes. As a result of this situation house prices, drop and mortgage defaults stack up.

Analysts claim that consumer spending should remain robust in order to prevent the economy from a recession. Still, the article suggests that consumers are being squeezed too far. It ends with Robert Brusca of FAO Economics’s saying that.

It is a weak picture of the consumer. Income growth, the raw material for spending, is fading (bbc.co.uk.).

Works Cited

“Inflation Rise Hits US Consumers.” bbc.co.uk. 2008. BBC News. Web.

“US Economy at a Glance.” One Minute World Use. 2008. BBC News. Web.

Parkin, Michael, and Robin Bade. Foundations of Economics. Pearson Custom Publishers, 2004.