Category: Inflation

Introduction

Countries have been thrown into protracted periods of insecurity due to inflation. Inflation is defined as the rate at which prices rise over time. Moreover, inflation is usually explained as a broad measure of price increases or increasing living costs in a nation. It can, however, be computed more precisely for particular items, such as foodstuffs, or services, like transportation. Inflation, in any context, refers to how much more costly one specific category of products and services has gotten over a particular period, most typically a year.

Discussion

Inflation is not always a terrible thing for the economy. Early phases of inflation, for example, can have beneficial impacts on a country’s entire economy. Inflation provides additional incentives for investors and businessmen to participate in economic activities, and as a result, they get better returns. Furthermore, due to the increased demand, producers can offer their products at more outstanding prices, leading to more considerable earnings (International Monetary Fund, 2021). Inflation’s medium and long-term effects, on the other hand, deter investors, resulting in poor or stopped growth in the economy.

The government and the central bank work together to keep inflation under control. Monetary and fiscal policies are two fundamental ways to keep inflation low and stable. 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. Furthermore, anchored expectations allow governments more leeway to undertake demand-stimulating policies. For example, anchored expectations may lead to a reduction in interest rates by the central bank, which will boost investment demand without significantly influencing inflation. De-anchoring occurs when prices and people’s perceptions move in opposite directions. Inflation rises swiftly during de-anchoring and becomes difficult to regulate (International Monetary Fund, 2021). The Central Bank must respond effectively to stabilize inflation expectations in these circumstances.

The steady rise of inflation across the world is major as a result of the coronavirus outbreak. According to the International Monetary Fund forecasts, inflation will continue to rise until 2022, when it will return to pre-pandemic levels. However, some elements could keep inflation high for a long time. Long-term supply constraints and rising housing costs are examples of such causes. High food prices and plummeting currency values may be contributory causes in developing countries (International Monetary Fund, 2021). While there is no definitive answer for the future of inflation, there are plenty of clues. Prices will remain steady if policymakers pay attention to the indications and implement sensible policies and appropriate actions.

I agree with the speaker’s points of view since the information in the video is accurate, and the speaker supports her comments with examples. The orator says that policymakers are critical in stabilizing inflation (International Monetary Fund, 2021). Furthermore, the presentation is clear and well-structured for easy understanding and detailed points. The speaker not only states the problem but offers remedies to combat inflation.

Conclusion

In conclusion, the impact of the pandemic on supply chain operations, energy pricing, cost of transportation, and consumer spending behaviors is expected to take a year (or more) to normalize. Effective policies and conditions will most likely prevent inflation from returning to pre-pandemic levels. The fact of the matter is that consumers may rest assured that unreasonable price rises will not continue indefinitely. The pandemic appears to be diminishing, and soaring inflation is expected to follow suit.

Reference

International Monetary Fund. (2021). Analyze this! Inflation[Video]. IMF Videos.

It is hard to disagree that a vast number of macroeconomic issues and challenges can negatively affect the lives of ordinary people, the performances of various organizations, and the overall economic state of a country. One such problematic concept is inflation, and when studying this primary macroeconomic phenomenon, researchers highlight the interconnection of realized inflation and inflation expectations. The former can affect the latter, and vice versa, meaning that both these concepts should be considered carefully. The purpose of this paper is to analyze an article that discusses this macroeconomic topic.

The article selected for this analysis is a thorough, peer-reviewed research by Binder and Kamdar (2022). The authors explain the ways that inflation expectations are set and can mutually influence realized inflation, highlighting the importance of this theme by stating that “the conduct of modern monetary policy relies on an understanding of inflation expectations” (Binder & Kamdar, 2022, p. 132). Overall, there are two approaches that may explain how expectations are formed: rational and adaptive ones. Thus, when inflation expectations are rational, they “incorporate all information that is useful in forecasting future inflation” rates, considering interest rates and other factors that can somehow affect the macroeconomic phenomenon in question (Binder & Kamdar, 2022, p. 135). At the same time, the key focus of adaptive expectations is on the past rates of realized inflation and the factors that caused it. While this approach also considers current circumstances, Binder and Kamdar (2022) notice that it generally leaves “readily available information about the subsequent course of inflation” unused (p. 135). Interestingly, according to the authors, the shorter the period of prediction, the less accurate these predictions are. In other words, it is easier to identify expected inflation over long periods of time than for the next year.

One should mention that the examples and cases provided in the article make the understanding of the topic better and prove the author’s statements. For instance, when demonstrating the interconnection between the anticipated and actual rates of inflation, Binder and Kamdar (2022) describe employers and their workers. If the latter expect high inflation, their actions can contribute to the realization of these predictions. Consider they ask their employer to raise wages; after the company does that, it decides to increase prices to compensate for the higher salaries. As a result, the expected inflation rates become realized precisely because they were expected (Binder & Kamdar, 2022). On the contrary, increased inflation levels during previous months or years can affect people’s anticipations. This knowledge is essential in order to be able to control this interconnection and probably influence the realized rates of inflation by correcting individuals’ predictions.

The reason why I selected this article is that the importance of inflation cannot be overestimated, and I decided to learn more about this phenomenon. When I saw the title of the study, I was intrigued by the division between expected and realized inflation, and getting acquainted with the examples and cases provided by the authors was when I made my final choice. This is a detailed yet concise and understandable discussion of the interconnection of the two concepts, and I believe that more people should be aware of this mutual effect to be able to control inflation. One of the most interesting points I gained from the study is that it is more effective to orient on both past tendencies and current information when making assumptions about how inflation will change in the near future. Finally, after these predictions are made, it is of vital importance to consider all the possible consequences before taking action – precisely one’s precautious measures can cause the expected inflation rates to become realized.

Reference

Binder, C., & Kamdar, R. (2022). Expected and realized inflation in historical perspective. Journal of Economic Perspectives, 36(3), 131-156.

Inflation

Inflation is traditionally defined as a consistent rise in the price rates within a specific industry or in the entire economy of the state, which is triggered by a rapid increase in demand: “Inflation is a situation in which, on the average, all individual prices are rising in terms of whatever is called money” (Makiinen 344); therefore, the increase in its rates is justifiably considered to be one of the factors that affect the state economy most negatively. When it comes to defining the effects of inflation on the Saudi stock market, one must mention that the latter shrinks significantly as the inflation rates increase.

Similarly, inflation has a range of negative effects on the U.S. stock market, seeing that it makes the key stakeholders lose an impressive amount of revenues.

As the chart provided above shows, the recent drop in the Dow Jones Rates signifies that the inflation issues in the United States are getting increasingly positive as far as the overall state of the American economy is concerned. Even though the infamous crisis of 2007–2008 (Makiinen 119) has had a rather drastic effect on the U.S. stock market, the performance of the latter can be deemed as quite positive at present. Nevertheless, the lack of stability in the recent

It would be wrong to claim, though, that inflation has only negative effects on stock markets in general and the designated ones in particular. By definition, inflation allows for the adjustment of relative prices (Makiinen 36), therefore, creating more room for providing customers with an opportunity to save by developing a more flexible pricing strategy. Nevertheless, when swinging out of control, inflation poses a significant threat to the wellbeing of the stock market. Hence, the inflation rates should be reduced in the U.S. and the UAE so that the corresponding stock markets could function properly.

Addressing Inflation Rates Concerns

To address the above-mentioned concern regarding the UAE inflation rates, which seem to have been unreasonably high since the infamous crisis of 2007–2008, the state government will have to introduce certain changes to the oil industry as one of the most profitable ones in the target market. Indeed, the consistent success, that the target industry has seen, is likely to serve as a major boost to the state economy and, therefore, bring the inflation rates down.

Apart from the above-mentioned solution, the choice of a supply slide policy should be viewed as an opportunity. There is no need to stress that the specified approach is typically viewed as the most common tool for addressing the inflation issue; however, the consistent use thereof does not make it any less efficient. It should be borne in mind, though, that the specified tool may require a significant period to take its effect on the state economy and the wellbeing of the U.S. residents, the outcomes of the policy in question still can be deemed as very strong. Therefore, the specified approach deserves to be taken into consideration as the means of managing the inflation rates in the state.

Deflation

Likewise, deflation can be viewed as a rather negative factor altering the environment of both the American and the Saudi Stock markets. According to the existing definition, deflation is typically identified as a reduction in the price rates in the economy of a specific country or the environment of a certain market: “The standard definition of inflation is a protracted period of generalized price increase, which can occur when too much money causes too few products” (Odekon 202). Therefore, it can be assumed that the specified phenomenon triggers a rapid decline in the profit of the target markets. Indeed, a closer look at the recent changes in the U.S. stock market caused by deflation will reveal that the market has suffered a drastic change once the increased deflation rates were introduced to it.

Likewise, the UAE market also experienced a significant drop in its growth rates as the deflation rates peaked in 2010. The specified phenomenon can be attributed to the fact that the organization has been experiencing a significant slowdown in its economic development, in general, and the recuperation of the oil industry, in particular, after the infamous crisis of 2007–2008. As the studies on the subject matter show, the state organizations along with private firms have experienced a significant drop in the stock prices; hence the necessity to galvanize the state economy by increasing prices for other commodities emerged. Although the UAE economy seems to have evaded the trap of deflation, some of its effects may still challenge the further evolution of the state economy and trigger rather undesirable results; for instance, a recent analysis of the UEA economy has shown that the deflation issue still echoes in some of the areas of the UAE economy: “According to HSBC UAE Purchasing Managers’ Index, overall input prices continued to increase in the UAE non-oil producing private sector during December. The rate of input price inflation eased and was the lowest since September 2010” (John par. 1).

Addressing the Issue of Deflation

A closer look at the target economies will reveal that the UAE is currently under a threat of facing deflation. Indeed, as a recent analysis of the current economic situation in the state shows, the prices for a range of goods and services have plummeted, thus, leaving several organizations suffering from a lack of income and, thus, facing the threat of an untimely demise (Jones par. 8)

Herein the threat of deflation to the UAE economy lies; if allowing the process of deflation to get out of hand, the government is likely to face severe issues regarding the rapid demise of a range of small and even medium organizations, particularly, sole proprietorships, which are especially vulnerable to the changes in the currency rates

When addressing the issue of deflation, one should view the adoption of the above-mentioned approach strategy as an opportunity. Although reducing interest rates seems the first-choice solution, it may lead to no effect in situations that include the so-called liquidity trap. Defined as “A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth” (Freenstra and Taylor 87), the latter is likely to impede the promotion of sufficient spending rates among the U.S. population; consequently, the economic conflict in question may spin out of control.

Conclusion

While the effects of the inflation on the U.S. and the UAE stock market can be viewed as having a partially two-sided effect on the state economy, one still has to admit that, when spinning out of control, they start posing a serious threat to the financial and economic wellbeing of not only the private and state entrepreneurship but also to the citizens. It is recommended, thus, that the governments of both states should consider the introduction of the tools that will help manage the inflation rates in; particularly, the adoption of the contractionary policy as the most popular tool for addressing the inflation-related issues and the tools for increasing the commercial bank’s revenues should be viewed as the most reasonable options.

References

Dow Jones Industrial Average 2006-2015 2015. Web.

Freenstra, Rovert C. and Alan M. Taylor. International Macroeconomics (Loose Leaf). 2nd ed. London, UK: Worth Publishers, 2013. Print.

John, Isaac. “Dubai Posts Deflation in 2012.” Khalee Times 24 2013. Web.

Jones, Harvey. “UAE Investors Ponder the Spectre of Deflation.” The National Business 2015. Web.

Makiinen, Gail E. Money, Banking, and Economic Activity. New York City, NY: Academic Press, 2014. Print.

Odekon, Mehmet. Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis. New York City, New York: Routledge, 2015. Print.

Introduction

The current research is anchored upon two main points of concern related to some exposure concerning the topic of the study. These two points will be considered majorly in relation to the issues that affect exchange rate. First of all, the focal point of this study is the effect of interest rate and inflation rates on exchange rate, as well as the time when the effect becomes adversely experienced. The question at hand is; what happens to the foreign exchange rate of NZDUSD whenever there is a change of this variables?

The second observation point to be made pertains to the differences in the exchange rate of NZDUSD among the two viable.

Methodology of the study

There is the need for coming up with a fine way of obtaining the necessary information and performing the necessary analysis in this study. The methods employed here have been considered due to their relevance and accuracy in use. The inflation and interest rates have been used as the response variables that are the dependent variables, and the New Zealand/ US dollar exchange rate has been used as the explanatory variable that is the independent variable. A basic OLS regression will then be run in order to see how these two variables are related to each other. The validity of the model will also be checked in order to discuss if there will be a violation of any assumptions. As it has been mentioned earlier, for the sake of coming up with a more conclusive deduction, there is a need to use more than one variable. The outcome for the simple regression will also be studied and some factors will be included in the model. The outcome will be checked for any form of difference with the model again.

In the data given, the formulation of numerical data is seen to have certain assumptions which are not satisfied with regard to the population samples used. The numerical hypothesis provides no basis for the choice of the confidence level of 95% in relation to the number of analysis to be performed. The basis for testing the null hypothesis is affected by the nature of sample distribution.

Data collected

The data used in this analysis is taken from the year 1989 in order to easier comparability of the results. This is because NZD was under control regime up to 1985, and the central bank introduced inflation targeting in 1989. If we use the data with different starting dates, comparability will not be consistent.

Here the interest and inflation rates can be seen as the ones that influence the increase steadily year after year. During this period, there was increase in exchange rate. As it was mentioned in Kapil (2011), “the investment and exchange rates volatility on the United States had significant impact on investment in the country, and they had a great impact in smaller and liberalized countries as well”. (p. 625). It is very important to put in mind that the figures shown in the tables involve some truncations and rounding off, and may thus not be one hundred percent accurate, but they are sufficiently close to the actual figures within the specified period. They can be relied on to give the necessary guidance on the issue at hand, and make the necessary deductions about the same.

Results

“Abnormal increase in inflation has a great impact on fixed income securities (Kapil, 2011, p, 152). Inflation creates a problem since borrowing a high –inflation currency becomes a hard to analyze statements. Such currencies normally have extreme high nominal interest rates, which usually ‘reflects compounding within a year’ (Moles, Parrino & Kidwell, 2011, p. 225), as the lender must be compensated for the loss of purchasing power. The high interest rate is acceptable because the borrower invests in comparatively inflation – proof asset exposure. The high interest expense, in reality, is mostly offset by the purchasing power gain from the diminishing real value of the debt (Shapiro, 2007,pp. 202).

This adjustment effectively replaces nominal interest expense with real interest expense, much closer to the interest measure in countries with lower inflation rates, it is also incidentally, and reduces interests’ expense increasing the interest coverage ratio.

The graph plotted above indicates an increasing trend. From the regression analysis performed, the following regression equation can be derived based on stepwise method:

NZD/USD=0.352x+0.376 and R²= 0.006

The stepwise regression equation presented above indicates the coefficient of determination R-squared as.006, which suggests that the stepwise regression performed between variables, is only able to predict 0.6% of the total variations observed in the values. The total variations is.105 from which.078 are explained via regression whereas 0.099 remain unexplained. This could be due to the lagging effect in the values, which is not addressed in this analysis. In addition, it is not addressed in this analysis due to the certain values that can be considered as outliers observed within the data.

As far as statistical analysis is concerned in this paper, two “t” tailed tests have been used in order to check the statistical significance of the coefficient of the regression. The‘t’ statistic is statistically significant then, as it is 1.18 meaning this variable can influence exchange rate positively.

NZDUSD vs. IRP are analyzed in the graph presented below. It can be noted that there is an upward trend in the interest rate. These interest rates affect the flow of foreign currency which, in its turn, affects the economy of the country. There is a spontaneous reaction of the current and capital accounts of the economy, as the interest rates of the same country are affected as well. The supply and demand of goods and services are affected by the nominal interest rates prevailing in the economy if the interest rates goes up, it affects the inflation and this calls for the change in the way things are done in the economy of any country (Correia, Flynn and Uliana, 2007).

International flow of capital heavily depends on investors’ expectations of rates of return in one country relative to other countries. Other things being equal, if interest rates rise in one country and stay the same in other countries, then the demand for the first country’s currency will increase, as investors move capital to the country with the higher rate of return. The same argument holds, of course, for international differences in rates of return generally, and not just interest rate differentials (Shapiro, 2007,pp. 106).

An important point in analyzing international capital flow is that individuals and firms move capital based on expectations of relative rates of return, and they do not move capital to finance a current-account deficit, or to get rid of a current account surplus. Ignoring statistical problems that create the statistical discrepancy, the capital-account surplus is necessarily equal to the current account passively finances the current account. The current and capital accounts are determined simultaneously through the interaction of all supplies and demands in the foreign exchange market.

The coefficient of IRP is 0.986. The positive value of coefficient is perhaps what is expected one could have regarding the relationship between NZD/USD and IRP. It is a common understanding that interest tend to increase foreign exchange rate and the model is suggesting that there is a direct relationship between the two variable. Therefore, the regression model implemented has predicted a positive relationship. The t-statistics for IRP is 0.6939; this means that the value has greater influence on the exchange rate. The above conclusion is supported by the result of the regression analysis presented in above.

Multiple regressions

Comparing these values, it can be observed that there is a difference between both values. From the provided table, the value of coefficient of which is PPP is less than the value of IRP using the regression equation. This difference explains that IRP has the ability to influence Exchange rate more than PPP and the regression to predict the variations assessed by the value of coefficient of determination that is only able to predict 89.0% of the total variations in the values of variables as compared to 0.6% of the PPP.

Recommendation and conclusion

Analyzing the information provided earlier in this paper, we can come to certain conclusions and provide the necessary recommendations that might improve situation. There is a positive coefficient between the variables from the calculations above. This means that providing more positive changes, any variable will influence the exchange rate.

Purchasing power parity does not work reasonably well in predicting the exchange rate between two countries when one of them experiences substantial inflation. In fact, the doctrine works reasonably well if two countries experience inflation, even at substantially different rates. Thus, supposing that prices in continentals rise by four times over a three- year period, whereas prices in regal rise by two times over the same period, we can come to a conclusion that in this situation, the theory of purchasing power parity predicts that the exchange rate should change so that the number of continentals per regal should doubled (Brealey, R., Myers and Marcus, 2007).

References

Brealey, R. , Myers S. & Marcus Alan. (2007). Fundamentals Of Corporate Finance. Boston: McGraw-Hill.

Correia, C., Flynn, D., & Uliana, E. (2007). Financial Management. Cape Town: Juta and Company Ltd.

Kapil, S. (2011). Financial Management. New Delhi: Pearson Education India.

Moles, P., Parrino, R., & Kidwell, D. (2011). Fundamentals of Corporate Finance. San Francinsco: John Wiley and Sons.

Shapiro, A. (2007). Foundations of Multinational Financial Management. New York: John Wiley & sons, Inc.

Weak economical positions all around the world experience a high rate of inflation; the problem is to be solved by the Federal Reserve System, the principal function of which is concentrated on inflation control without recession triggering. It is necessary to investigate the principle functions and role of the system to understand the methods through which it combats the problem of inflation spreading.

The article ‘Inflation and the Federal Reserve’ by Richard Cook; this source can be used to describe the central threat of inflation and identify the principal steps to be developed by central banks, government, and Federal Reserve, to control inflation and balance it with the economical development within the state. The article will be used in the research project to reflect the power of the Federal Reserve System and its annual planning and economical assessment for monetary market stabilization.

Uncontrolled inflation can lead to unexpected destruction of the national economy of the country; the project is focused on the examination of key methods allowing moderating the influence of inflationary trends on the national economics. Ben Bernanke, 2005, managed to exemplify industrialized countries where the Federal Reserve is based on inflation targeting adoption being the background of monetary policymaking.

Primary sources for the research project conduction are to be taken from internet sites disclosing the historical and political value of the Federal Reserve for economical development; thus, Lawrence White, 1982, dedicated his work ‘Policy analysis, Inflation and Federal Reserve: The Consequences of Political Money Supply’ to the disclosure of historical overview US Federal Reserve activities, covering the peculiarities of coping with inflation problems. This work will be helpful for the highlight of the key balances and fluctuations in the inflation rate in different periods of American economical development. The project team can stick to various historical and modern economical encyclopedias as secondary sources, to follow the stages in the structural and functional form of the Federal Reserve.

The central project objectives are concentrated on the identification of the principal functions of the Federal Reserve; so, the inflation control is fulfilled through the following tasks: 1) national banking system supervision to assure consumers; protection; 2) serve the function of the Central Bank for the government and other baking systems; 3) stability maintenance within financial markets, especially under the threat of potential crisis.

To conduct an effective business project on Inflation and Federal Reserve System, it is necessary to follow the definite aspects in the literature and online sources searching, which will allow supporting the provided conclusions: to identify the ways of Federal Reserve affection on the economical stabilization within the US; to follow historical stages in the activities of Federal Reserve; to identify the basic structural peculiarities of the system; to provide a list of necessary sources supporting the facts described in the research paper.

It is necessary to conduct microeconomic research within the American business and industrial system to identify the direct connection between the real economy and price inflation; besides, the project is to cover the necessary monetary policy to be worked out for effective problem-solving. For example, Solow and Taylor, 1999, provided the required data through the illustration of key microeconomic models in their book ‘Inflation, Unemployment, and Monetary Policy’; it is necessary to underline the fact that this work will be used for identification of the most significant and effective measures to be provided for tackling inflation problem.

It is necessary to provide the methods through which monetary control is fulfilled and underline the basic sources of influence on its development. The project should touch on the concepts of ‘reserve ratio’ and ‘discount rate’ being involved in the activities and strategic planning of the Federal Reserve. It should be stressed that an open market system is usually achieved using certain transformations within the reserve ratio, to be investigated in the project.

The team can stick to economical and political reports of various prominent trends, covering the aspect of inflation balance in the national economy. For example, ‘Rapid trends – Gold and Silver Bullion’ discusses the industrial view on the economical position of the USA through the inflation impact on its development. The article discloses some figures characterizing the position of US currency in international monetary markets.

So, the project, being dedicated to the highlight of the Federal Reserve’s role in inflation stabilization, will be predominantly based on the research of internet resources, articles, and books, as well as reports and general encyclopedia data. It should be stressed that the working process on the business project will cover the analysis of the banking system about the economical development during the period of the global crisis; the inflation control adopted by Federal Reserve will allow assessing total productivity of the state economy. The effectiveness and sufficiency of the report are dependants on the visual supportive data, graphs, and charts, illustrating the connection between inflation and strategic activities worked out by the central Federal Reserve aimed at its control.

References

1. Cook, R. (2007) Inflation and the Federal Reserve. Web.
2. Bernanke, B. (2005). The inflation-targeting debate. University of Chicago Press.
3. Rapid trends – Gold and Silver Bullion. (n.d.) Word Press.
4. Solow, R. and Taylor, J. (1999). Inflation, Unemployment, and Monetary Policy. MIT Press.
5. White, L. (1982). Policy analysis. Inflation and Federal Reserve: The Consequences of Political Money Supply’. Web.

Inflation is one of the most prominent topics across the globe as all nations try to recover from the effects of the recent COVID-19 pandemic. Canada felt some of the worst of the pandemic’s impacts, making this topic especially interesting for all stakeholders in the country. This proposal is driven by the research question: what are the inflation dynamics in the Canadian context? The paper will present three articles exploring these issues, presenting their publication information, summary, and contribution to understanding the research question.

Sharon Kozicki, Jill Vardy, and Laurence Savoie-Chabot’s article “Price check: Inflation in Canada” on the Bank of Canada’s website discusses Canadian inflation. The blog piece was published in February 2019 and addresses this issue and its relevance to the nation. The article explains this concept and talks about its history, purpose and use, factors influencing it, what it means to the economy in its various states, and the ideal rate. The authors define inflation as the rate at which products and services rise in a given economy (Government of Canada, 2022). They present how inflation tells of the overall health of the Canadian economy and how each person experiences it differently using the example of a smoker with a car and a non-smoker cyclist.

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 an agreement between the Bank of Canada and the Government of Canada. The commentary concludes with an explanation of how the bank achieves the desired inflation; by adjusting its key policy interest rate.

Kozicki, Vardy, and Savole-Chabot’s article characterizes inflation, including presenting various data about its workings in the Canadian context, which is one of the ways it contributes to answering the research question (2019). The authors also touch on the history, function, and purpose of inflation in the country’s economy, thus providing in-depth answers to the topic. Finally, the article serves as a good introduction that gives the researcher a foundation upon which they can build the rest of the research.

Statistics Canada’s “Rising prices are affecting the ability to meet day-to-day expenses for most Canadians,” released on June 09, 2022, on the authority’s website, and The Daily discusses the impact of inflation on Canadians. The article talks about how the current rate of 6.8% is way higher than the desired rate of 2% and presents the ramifications on citizens (Government of Canada, 2022). The authority presents various findings from a survey conducted over two weeks from April May 19 to May 1, 2022. The results show that around 40% of Canadians felt the effects of rising food prices, 32% those of higher transportation costs, and 9% of shelter and expenses related to housing (Kozicki et al., 2019). Further, there are disparities between demographics; for example, younger Canadians are experiencing the brunt of the increase in housing-related prices, and people in urban cities that related to food.

Canadians have resorted to various adaptation mechanisms to cope with the rise, with most altering their lifestyle and spending habits to fit the new situation. Overall, higher prices have had a very detrimental impact on Canadian society that keeps worsening every day. This source helps contribute to a deeper understanding of the research question by providing concrete examples of how inflation has manifested in Canada. The authors present findings from a survey conducted over a substantial period and featuring an adequate number of participants, and, therefore, credible and actionable. The article also gives insight into the impact of inflation and its relation to economic health by presenting real-world scenarios as they have occurred in the nation. Finally, the presented content gives the reader an idea of what unfolds when there is significant fluctuation in inflation.

Angelo Melino’s article “Inflation Targeting: A Canadian Perspective,” published in 2018 in the International Journal of Central Banking, discusses inflation targeting from a Canadian point of view. The journal article touches on the monetary policy framework, providing an overview of its history, application, and evolution amid changing demands from various stakeholders. Inflation targeting was introduced as a response to high inflation levels in the early 1990s, with the government and the Bank of Canada committing to reducing the rate to a 2% target by 1995 (Melino, 2018). Received with skepticism at first because of the lack of empirical evidence and academic research, the nation soon embraced the concept once it demonstrated its ability to keep the rise in prices in check. The framework held its own and helped the nation navigate turbulent and tranquil times, quickly becoming the gold standard in ensuring stable, reliable inflation.

However, the 2007 financial crisis called to question the proper use of inflation targeting, prompting several changes to the Bank of Canada’s approach. The author argues that a lot would change in the country due to the recession’s implications, but the inflation-targeting methodology will remain largely the same because of the soundness of the principle behind it. Finally, this framework will remain superior to alternatives like price-level-path targeting for the foreseeable future as it is the best way to ensure the appropriate rate of increases in the price level in the country.

This source helps the researcher and reader understand the topic and research question by providing a comprehensive discussion and analysis of inflation in the Canadian context. The author goes into detail about the dynamics of the rate of increase in prices, comparing current methodologies that can be used to ensure a constant rate and analyzing each and its feasibility. Melino also looks toward the future and talks about the different scenarios that might unfold with the evolution of monetary policy in Canada, showing why the policy is likely to remain unchanged for a while. This source offers an immense amount of knowledge needed to adequately characterize inflation in Canada, including its manifestation, background, present, and future, facilitating a clear understanding of the phenomenon.

Inflation is a crucial part of any economy, especially now that the world is recuperating from the massive disruptions and losses caused by the COVID-19 pandemic. Canada is also on the path to recovery and is currently faced with a rate three times the 25-year average (Government of Canada, 2022). All stakeholders must become aware of the current situation to have a chance to make things better. Combined, the articles in the discussion above offer a succinct explanation of this phenomenon in the Canadian context, leading to a better understanding of what is happening.

Introduction

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 average cumulative price change since 2000 is 76%, while the annual average inflation rate is equal to 2.52% (U.S. Bureau, 2022h).

Discussion

The prices of many daily items on the list have increased by approximately the same value. It is particularly noticeable in food pricing, where the cumulative cost of chicken has increased by 75%. However, even within the same category, there are several outliers, such as ground beef (225%) and bananas (29%). Various factors affect the prices, and it is possible to explain each of the items. For instance, there is a large surplus of bananas globally, which are typically imported from Latin American countries (Freshdelmonte, 2022). As a result, the prices for bananas do not deviate as much as for the average goods.

The opposite is true for daily items that the country lacks. For instance, the Russian-Ukraine war has significantly affected energy supplies, including gas and oil. Moreover, it affected the global supply chains that connected Russia, Europe, and the United States. As a result, the cost of electricity and gasoline has increased significantly, even considering the average inflation rate. It is a global problem, and this situation is likely to persist until the conflict is resolved or oil companies choose alternative policies. Additionally, the government can intervene in the market and implement new regulations and policies to make these daily necessities more accessible to people with average incomes.

Conclusion

Lastly, the inflation rate for electronics is not entirely accurate because the level of technological development is drastically different. It is particularly noticeable over the period of twenty-two years, and most people in 2000 could not imagine how much the technologies would develop. As a result, even though an average plasma tv cost approximately $7,500 in 2000, this price was due to limitations in manufacturing and overall knowledge of electronics. In summary, while the items on the list represent the inflation rate to an extent, it is critical to analyze each product separately to understand the causes of the price change.

Bibliography

Freshdelmonte. (2022). Why bananas have avoided inflation – So far. Web.

MacLoughlin, D. (2021). The average price of sneakers. Run Repeat. Web.

Retirepedia. (2021). Cost of living in 2020. Web.

Statista. (n.d.). Average price of new and used passenger cars sold and leased in the United States from 1990 to 2010. Web.

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U.S. Bureau of Labor Statistics. (2022b). CPI average price data, U.S. city average (AP). Item: Ground beef, 100% beef, per lb. (453.6 gm). Web.

U.S. Bureau of Labor Statistics. (2022c). CPI average price data, U.S. city average (AP). Item: Chicken, fresh, whole, per lb. (453.6 gm). Web.

U.S. Bureau of Labor Statistics. (2022d). CPI average price data, U.S. city average (AP). Item: Bananas, per lb. (453.6 gm). Web.

U.S. Bureau of Labor Statistics. (2022e). CPI average price data, U.S. city average (AP). Item: Strawberries, dry pint, per 12 oz. (340.2 gm). Web.

U.S. Bureau of Labor Statistics. (2022f). CPI average price data, U.S. city average (AP). Item: Electricity per KWH. Web.

U.S. Bureau of Labor Statistics. (2022g). CPI average price data, U.S. city average (AP). Item: Gasoline, all types, per gallon/3.785 liters. Web.

U.S. Bureau of Labor Statistics. (2022h). CPI inflation calculator. Web.

Introduction

Economics is one of the bases on which modern human society is built. The levels of people’s wellbeing, their incomes and expenses, the rates of industrial and agricultural development, and many other factors depend on and derive from economics. At the same time, there are serious threats to this basis of the proper social development that Sloman and Hinde (2006) call the “traditional macroeconomic issues” (Sloman and Hinde, 2006, Chapter 6).

These issues include unemployment, the unequal balance of payments, problematic economic growth, and inflation. The latter is the most dangerous issue in many respects. First, inflation means a decrease in the value of the local currency. Second, inflation is caused by increased spending and leads to increased prices. Third, inflation slows down the economic growth of the country. Therefore, national monetary authorities should react properly to higher inflation rates.

Literature Review

The review of the relevant scholarly literature allows coming closer to defining the techniques that monetary authorities can use in situations of inflation increase. Thus, Begg, Dornbusch, and Fisher (2008) focus predominantly on the meaning of inflation for the overall bargaining power of people. More specifically, these authors connect the uncertainty regarding inflation rates with the uncertainty that people experience regarding the real values of their incomes (Begg, Dornbusch, and Fisher, 2008, p. 506). Therefore, what monetary authorities can do in this situation is provide people with actual inflation projections and specifically designed strategies of inflation reduction, which will be a monetarist approach allowing the economy to recover through its resources.

Critical Analysis

Further on, Griffiths and Wall (2004) consider the importance of regulatory policies implemented by the government, and the monetary authorities it controls, for developing people’s confidence during inflation (Griffiths and Wall, p. 414). Thus, the uncertainty associated with inflation can be reduced when people see that the authorities work on solving the problem. An example of such a policy is the Keynesian approach taken by the Bank of England that establishes interest rates about the national economic goals, participates in the international economic transactions, and maintains “confidence in the note issue” (Griffiths and Wall, 2004, p. 414).

Moreover, McAleese (2004) expresses an interesting point of view according to which inflation is first of all the product of governmental activities. Monetary authorities, as the bodies that are usually subordinated to the government, thus also play an important role in inflation emergence and elimination (McAleese, 2004, p. 282). According to McAleese (2004), inflation is sustained when the money supply is accompanied by permanently increasing spending levels (McAleese, 2004, p. 283). Therefore, the best alternative for monetary authorities to react to higher inflation is to reduce its regulatory influence in private enterprises and banks and limit the amount of money supply in the country. In other words, the monetarist approach should be limited in favor of the Keynesian one.

Implications

Accordingly, the findings of the above review of the relevant scholarly works allow stating that the major role in forming an inflation situation in a country should be attributed to the government and the monetary authorities it controls (McAleese, 2004, p. 283). Therefore, the task of reacting to higher inflation is to complete the task for the monetary authorities to solve. The basic practices that such monetary authorities as the central banks, the national treasury, and the ministry of finance can implement include:

• Limiting the governmental regulation of private financial institutions and enterprises;
• Maintaining and increasing confidence in the value and strengths of the local currency;
• Maintaining control over the note issue in the country;

At the same time, the fact that none of the discussed authors considers the possibility of artificial price regulation about inflation allows assuming that such a practice is not efficient and can bring more damage to the country’s economy than benefit it. So, monetary authorities should prefer a Keynesian approach to inflation stabilization rather than a monetarist approach.

Accordingly, the implications of the above-discussed findings are rather important. The role of monetary authorities of every country in reacting to higher inflation rates is crucial, and it becomes even more important when one realizes the fact that the inflation regulatory policies affect not only the economic conditions of the country but its social and political development and the lives of ordinary people in this country. Depending on the inflation regulatory policies implemented, people’s income can be devaluated or increased in value; the bargaining power of people can grow or decline; the overall levels of wellbeing in the country might increase or decrease.

Conclusions and Recommendations

Therefore, the above discussion allows concluding that any policies through which monetary authorities react to higher inflation rates in a country should be context-based, i. e. Keynesian. What can be recommended in this respect is that monetary authorities should find a perfect balance between regulation and deregulation in providing their policies, especially about private financial and industrial entities. Artificial price regulation or issuing additional banknotes do not work alone, so monetary authorities should combine various approaches to achieve success in any particular situation in the objective reality.

Reference

Begg, D., Dornbusch, R., and Fisher, S. (2008) Economics, 9th Ed., McGraw Hill Higher Education.

Griffiths, A. and Wall, S. (2004) Applied Economics, 10th Ed., Financial Times / Prentice Hall.

McAleese, D. (2004) Economics for Business: Competition, Macro-Stability and Globalisation, 3rd Ed., Financial Times/ Prentice Hall.

Sloman, J. and Hinde, K. (2006) Economics for Business, 4th Ed., Financial Times/ Prentice Hall.

Concept of inflation

It is a continuous rise in prices usually referred to as a trend factor. It can also be referred to as the index number for inflation to occur, the average prices must increase whether other individual prices remain constant or not. Alternatively inflation can be referred to as a situation where demand persistently exceeds supply. Inflation differs from country to country and even within a country itself (National Inflation Association, Para 2).

Inflation can be measured in the following ways;

• Monetary inflation; caused by increase in the increase in the amount of money in circulation in an economy.
• Imported inflation; brought by high propensity to import capital goods.
• Situational inflation; caused by situational factors in the economy.
• Gradual inflation.
• Persistent inflation; brought by forces of supply and demand.
• Hyper inflation; most extreme form of inflation.

Inflation in the US

Inflation in the United States is calculated from the data got from the consumer price index and is collected and compiled by the Bureau of Labor Statistics of the US. The economic financial crisis proved that inflation is a serious issue and can affect the lives of many as seen in the US financial market (InflationData.com, Para 1). The bureau of statistics has compiled data since 1982 using the base of 100 points. The table below shows the inflation rate from the near past to present levels;

Table 1. US Bureau of Labor Statistics data on inflation rates.

The table above represent the inflation rates calculated by using the consumer price index. It can be observed that the US economy is experiencing a relatively low inflation rates ranging from 5% to -0.2%. In the period of 2008 the US economy experienced a negative inflation i.e. there was a decrease in the value of the monetary and other financial capital meaning the economy shrunk 2.10% in July 2009, this contributed to the financial crisis which saw stocks decrease in value and the rates rise. The welfare of inflation is evident in the US inflation rates this year since it scores a positive inflation rate (InflationData.com, Para 2).

The US has been enjoying a low or moderate inflation rates which are characterised by fluctuations in the real demand of goods and services, this enables the US Bureau of Labor Statistics to use price index since it consists of about 95% of the inflation since 1982. It is important to keep the Dollar at a stable rate to prevent hyperinflation.

Conclusions

The inflation rates should be kept low and stable for the economy to enjoy an enabling environment for trade and also enhance predictability in the stock market and the business industry.

Works cited

“Historical US Inflation Rate 1914 – Present”. InflationData. 2010. Web.

“Inflation is the Only Vitally Important Economic Issue”. National Inflation Association. 2010. Web.

Introduction

This paper presents a detailed discussion on the effects of increase in the prices of oil both in the short run and long run period of time. The risk to growth following a progressive increase in the price of oil will be conclusively discussed both in the short run and long run period. As a response measure to the increase in the price of oil, monetary policy formulated by the Federal Reserve Bank is worth investigating and making inferences.

The threat to growth following rising price of oil

In the early 70s, decrease in the output and rising inflation rates lead to sharp rise in the price of oil. Even In the year 2007, much more rise in the price of oil was associated with fluctuation in the outputs and inflation rates.

During the same year, the alterations in the price of oil were activated by a change in the supply of the same commodity in the market place. War between the Arab and Israel prompted the formulation of an oil embargo consequently reducing the supply of oil in the market place in 1973. Another factor sourced from the supply side was the consequences of the Iranian revolution in the year 1979.

On the other hand emerging economies of china and Japan are the recent cause of the rise in the price of oil. Rapid economic growth and development taking place in these nations creates demand for oil to be used in various sectors of the economy. In recognition of the fact that developing nations are considering trading with up coming economies, expenditures on the products from the United States reduce to a greater extent.

Use of AD-AS model

This is a model relating the price with the level of production in an economy with reference to employment rates, gross domestic produce policies to stabilize inflation rates, an ultimately macroeconomic observable fact. The AS-AD model takes into custody the interface between the Aggregate Demand (buyer) and the Aggregate Supply who in this case are the sellers both analyzed in the long and short run period of time. In a macroeconomic context, aggregate demand is specified by a sum total of C+I+ G+ (X-M) in an open economy.

Effect of a rise in oil price on inflation and output

The graph below shows the effect of a rise in oil price on inflation and output. An inward shift in SRAS following a rise in the price of crude oil imparts on the price level causing a contraction of the AD signified by a movement from Y1 to Y2. Y f c represents full employment of factors of production in the long run. It is now evident that continuous increase in the price of oil reduces output level and raise inflation from P1 to P2.

Effect of the response of Reserve Bank to the oil price increase

The reserve bank can manipulate the interest rates to stimulate growth by creating demand in the economy. Low interest rates attract people to borrow from financial institution consequently raising their purchasing power. Recessions are related with the surging prices of oil and the increase in the rates of funds from the Federal Reserve Bank. It is important to focus on some economic effect of the prices of oil and the federal funds rate.

An empirical approach tries to analyze the decline in output from an increase in the price of oil. In an investigation by economic researchers, the findings were that an increase in the prices of oil and a subsequent increase in the funds rate by the Federal Reserve Bank would have a cumulative effect of lowering the gross domestic product. In the year 2004, there was a 30% increase in the price of oil from $33 to $ 45 per barrel.

The immediate reaction was maintaining the funds rates at a constant value which ultimately reduced the growth rate by only 1.2%. If the funds rates had been increased (in the form of tightening the lending rates), then prediction shows that development would have declined by 2.1%. The investigation shows a clear difference in the effect of an increase in the funds rates and when the rate is maintained at a constant value.

Federal Reserve Bank is usually responsible for the changes in the interest rates which affect the supply of money in the market. A higher interest rate acts as a disincentive to borrowing money from the bank. The succeeding consequence is little money chasing the same product. On the other hand, a decrease in the interest rates motivates people to borrow more funds from the bank therefore increasing the supply of money in the market.

This means that more money chasing the same product. Because of the competition for the same product, it is possible that growth in national income will be registered but at a higher cost of inflation as indicated in the graphical diagram above. The use of monetary instrument to influence growth in an economy by a decrease or increase in the interest rates is strictly under the control of Federal Reserve Bank.

Conclusion

This essay is explicit on the effect of high prices of oil on output and inflation rates. Exogenous variables are responsible for the shift in the AD or AS curve in the short run. The long run graphical illustration of a supply curve is a straight vertical curve.

This shows that in the long run, the supply curve is not affected by exogenous variable in the industry. To regulate the supply of money in the market, monetary policy is employed by the Federal Reserve Bank. For a progressive increase in the price of oil, the model clearly substantiates the value attached to maintaining the interest rates at a constant rate.

Reference List

Bernanke, S, M Gertler & M Watson, “Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: A Reply,” Journal of Money, Credit, and Banking, vol. 36, no. 2, 2004, 287-91.

Olekalns, N, et al, Principles of Macroeconomics, 8^th edition, McGraw-Hill, North Ryde, N.S.W, 2008.