If someone earns a sum of money, and saves it rather than spends it, then, in no way can a person be losing wealth if not for inflation, which prompts the prices of all goods and services to rise. One may see this as a trend among businesses to maximize their profits. In reality, the root cause of the problem is not with businesspeople, but the Federal Reserve System continuously adding more money into the economy. The article I have chosen to summarize examines the U.S. economy of today mainly the food and energy prices that have rose sharply since March 2003, which has prompted the Fed to concern itself with the onset of inflation.
In reality, what triggers the rise in prices is an increase of money in circulation, which is a result of the actions performed by the Federal Reserve. The Federal Reserve, being the government agency responsible for printing the nation money supply, determines how many dollar bills are put into circulation. The dilemma arises because, when more money is added into the economy and an individual has not spent any of it, the person is now poorer in relation to everyone else than they once were. Adding more money into the economy dilutes the value of each individual dollar, thereby decreasing its purchasing power.
The article states that the price index gained larger than expected .3 percent, which adds to the inflation anxiety on Wall Street (Freilich). Inflation, however, tends to hurt the poor far more than it does the rich. For example, if a woman retires with four thousand dollars saved up, and the cost of a decent living is five thousand, then she only has eighty percent of what she needs to survive. Then, a year later, if there is one hundred percent inflation, then the necessary cost of living becomes ten thousand dollars. Even if that woman still had four thousand dollars, she would now have only forty percent of what she needed.
Though they often have been blamed for inflation, businesses themselves are victims of inflation, as each company sees the costs of all of its resources rising. Retailers pay rising costs to distributors, who pay a rising cost to suppliers, who pay a rising cost for their resources. If a businessperson does not raise the prices of the merchandise, while the prices of resources are rising, then he or she will have to reduce profits or cut back on much-needed supplies and services to maintain the company, which, in the end, could mean less business and still result in less revenue. Thus, inflation necessitates that businesses raise prices and employees demand higher wages, which often takes place in a random fashion.
The article further states that prices received by farms, factories and refiners gained sharply to 0.8 percent last month, the largest jump since March 2003. Additionally, the Labor Department said first-time filings for state jobless aid fell 15,000 to 336,000 in the week ended June 12, their lowest level since early May. Increase in prices and an improved job market suggests that the U.S. economy’s momentum is likely to build in the coming months.
The article adds stating that in addition to the growing economy, the dollar first rose against the euro and prices for U.S. government bonds fell, pushing yields up. Investors are worried about inflation pressure because stocks slipped, in part because of inflation concerns, but also due to news of more deadly bloodshed in Iraq.
Inflation is understood that when governments print plenty of money and spend considerably, watch out for rising prices to continue. However, the volatile stock market and with elections coming soon, I believe to expect the unexpected.
Freilich, Ellen. Data Puts Inflation in Focus. Retrieved online Jun 17, 2004 Website: http://www.reuters.com/financeNewsArticle.jhtml;jsessionid=0RS0105W2AE4ECRBAEKSFEY?type=businessNews&storyID=5450085
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