Inflation and the Federal Reserve Essay

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Inflation and the Federal Reserve Essay

Introduction

Inflation and unemployment are two macroeconomic components that affect a country’s economy or global economy. This paper addresses these two macroeconomic factors (Inflation and unemployment) and describes a current event related to actions taken by the U.S. Federal Government Reserve Board. The purpose of assessing these two macroeconomic factors is to analyze critically, visualize, and recommend the impacts of these factors on various sectors of the economy. Inflation in the economy shows how prices of products and services are changing within a given period. It also shows the currency’s purchasing power, as the U.S. dollar, over some time (Pettinger, 2021).

On the other hand, unemployment is the state of not finding a job while you are looking for one. Unemployment in the United States is clearly defined through the changes in unemployment rates in a given period. High inflation in an economy can lead to unemployment as the uncertainty of high inflation leads to a low number of investments and economic growth. The Federal Government Reserve Board has issued solutions for raising the interest rates to curb rising inflation rates in the United States of America (Cox, 2021). The US National Reserve Board also took action. It ended the unemployment benefits program in September 2021, which was put in place in March 2020 to caution against the effects of the COVID-19 pandemic (Iacurci, 2021).

Critical Analysis

The current rise of inflation in the United States of America is an economic issue that the Federal Reserve Board has looked into and various actions to prevent further rise. The Federal Government Reserve is taking steps to increase the interest rates to control the money supply in the economy. There is a general tendency in economics: interest rates and inflation are inversely related. The US Federal Reserve is responsible for the monetary policies that influence the rate at which the interest on the loan is applied. When there are low interest rates on loans, most people acquire these loans, increasing the amount of money in circulation (Pettinger, 2019).

Similarly, when the interest rates are high, economic growth slows down, and inflation decreases. In the current situation in the US, inflation reflects the rise in the prices of goods and services. This is due to the high demand for few products and limited services. A moderate increase in inflation does not necessarily hurt the economy but the consumers of the products with inflated prices. The current rise of inflation is controlled by increasing the interest rates, which would reduce economic activity and investments, thus decreasing the inflation rate. The best indicator of inflation is the Consumer Price Index (CPI), which measures the price change of a basket of services and goods used by households (Pettinger, 2019).

Unemployment benefits are crucial during a recession such as COVID-19. The US Federal Reserve Board removed the unemployment benefits program that started in March 2020 to caution against the rising unemployment rates during the pandemic period. The COVID pandemic brought business closure, lockdowns, and work-from-home policies that triggered a dire economic recession. The Federal Reserve took monetary policies to deal with unemployment rates and uncertainty. Unemployment benefits provide temporary help during the recession and partly replace the lost earnings for a while. When economic growth resumes removing the unemployment benefit is crucial since the unemployment rate has been reduced. Another example of a temporary unemployment benefits program funded by the federal government is the Emergency Unemployment Compensation (EUC) which started in 2008 and halted in December 2013. One advantage of unemployment insurance is that it acts as a wage supplement and prevents further consumer spending. Although the benefits are less than monthly income or earnings, it is crucial in maintaining consumption and money supply in the economy. The Federal Reserve Board took action to end the COVID unemployment benefits in September 2021 and was informed through the resumption of business and the economic recovery that is still ongoing. With the growth of the US economy going up in 2021 compared to 2020, the unemployment rate also increased compared to 2020 when various restrictions hindered business operations (Iacurci, 2021).

Visualization

The inflation rate in the United has been on the rise in the recent past. CPI is a known indicator of inflation. It is the most used method by statisticians and economists to check inflation and deflation (Esther Pak, 2011). CPI measures the percentage change in the price of certain services and products consumed by households. It measures price changes of services and products such as food, transportation, and medical care. It also covers the difference in workers’ incomes, including retirement income. The U.S. Federal Reserve Board works towards maintaining 2% inflation annually. However, the Federal Reserve is considering raising the interest rates to lower rising inflation (‘U.S. unemployment rate: adjusted, 2021 | Statista’, 2021). The prices of various categories exceed 2% inflation, and some have dramatic changes, as shown below.apparel 4.3%

Unemployment benefits to help with rising unemployment rates in the US due to the COVID-19 re cession were scrapped in September 2021 as the unemployment rates reduced and the economic recovery started. The graph below shows how the unemployment rates have decreased from Dec 2020 to Dec 2021 (‘U.S. unemployment rate: adjusted, 2021 | Statista’, 2021).

Recommendations

Rising inflation and unemployment are key issues that the national and global economies try to control. In periods of inflation, the Federal Reserve has the primary policy of reducing inflation through monetary policies. The basic monetary policy increases the cost of borrowing which discourages spending, thus reducing inflation and economic growth. The Federal Reserve should also have a tight fiscal policy of lowering government spending and higher income tax. This fiscal policy will reduce aggregate demand leading to slow growth and less demand-pull inflation. There are also various recommended policies to reduce unemployment. Fiscal policies such as increasing government spending and cutting taxes help improve aggregate demand and economic growth, hence more jobs. Lowering the taxes raises disposable income, thereby increasing consumption and aggregate demand. An increase in Aggregate demand leads to higher GDP (Pettinger, 2019).

When economic growth is high, firms can produce more, requiring more workers. The Federal government should also fund public construction projects to create employment. This includes building bridges, roads, and other infrastructure to reduce unemployment by hiring workers, engineers, and contractors. Inflation and unemployment tend to be inversely related since the increase in interest rates reduces inflation but causes slow economic growth and a rise in unemployment (Pettinger, 2019). Therefore, in implementing the recommendations, it is crucial to look at other factors that may affect inflation and unemployment. It is essential to solve both inflation and unemployment since uncertainty in inflation leads to lower investments, thus decreasing growth rate and job creation.

Conclusion

High inflation can cause unemployment. For instance, in the case of hyperinflation or uncontrolled rates of inflation, there is a decline in competitiveness and lower export demand, causing unemployment in the export industry. Hyperinflation can even cause businesses and companies to shut down since they can’t pay workers, thus spiking unemployment rates. Therefore, these two economic indicators are crucial, and various monetary and fiscal policies are required to keep them sustainable. When a country’s inflation rate is high, it loses its purchasing power; thereby, the currency declines its value. Although inflation hurts economic growth, falling prices or deflation is also not desirable as consumers delay purchasing products and services, expecting the prices to fall further. This leads to less income and also less economic growth. When the unemployment level is high, the standard of living is also high, leading to less economic growth.

References

Cox, J. (2022). Fed members ready to raise interest rates if inflation continues to run high, meeting minutes show. Retrieved 9 February 2022, from https:www.cnbc.com20211124federal-reserve-releases-minutes-from-its- november-meeting.html.
Esther Pak, M. (2011). Is CPI an Effective Measure of Inflation? [online] Morningstar UK. Available at: [Accessed 9 February 2022].
Iacurci, G. (2021). Retrieved 9 February 2022, from https:www.cnbc.com20210607states-will-be-ending-federal- unemployment-benefits-this-week.html.
Pettinger, T., (2019). Policies for reducing unemployment – Economics Help. [online] Economics Help. Available at: [Accessed 8 February 2021].
Pettinger, T., (2019). Policies to reduce inflation – Economics Help. [online] Economics Help. Available at: [Accessed 7 February 2021].
U. S. unemployment rate: adjusted, 2021 | Statista. Statista. (2021). Retrieved 9 February 2022, from https:www.statista.comstatistics273909seasonally-adjusted-monthly- unemployment- rate-in-the-us.
United States – monthly inflation rate December 202021 | Statista. Statista. (2022). Retrieved 9 February 2022, from https:www.statista.comstatistics273418unadjusted-monthly