Inflation and Government Economic Policies Essay
Inflation and Government Economic Policies
Inflation is described as the process by which prices are continuously rising or the value of money continuously decreases (Consumer Price Index Frequently Asked Questions, 2013). As the definition explains, this is not something that would be desirable for the government or its citizens. For example, Germany during the 1920’s experienced a period of hyperinflation. Germans literally had to carry wheel barrels of money to buy groceries. The price of a loaf of bread rose from around 200 Marks to over 200,000,000,000 Marks. Inflation is measured in several ways including Consumer Price Index, Producer Price Index, Employment Cost Index, Gross Domestic Product Deflator, and several other methods (Consumer Price Index Frequently Asked Questions, 2013).
Inflation can be caused when the demand of goods and services cannot be met. Since demand cannot be fulfilled, manufacturers can increase the price of goods, thus causing inflation. Inflation can also be caused when there is too much money in circulation. Money can lose its value if everyone has too much of it. In order to try to control inflation, the government can regulate fiscal policies. Employees’ wages can play a big role in inflation. If everyone is making a lot of money, then prices can increase. Lower incomes actually help governments avoid inflation. Another method of regulating/manipulating inflation is by controlling aggregate demand, the number of goods and services requested at the given price point. Aggregate demand can be altered by either imposing taxes or decreasing and restricting government spending.
According to BLS.gov, CPI, or Consumer Price Index, is the means by which we measure change in prices urban consumers pay for goods and services in the market basket. This measures what consumers pay on a daily basis for goods and services. Since 2000, CPI has been increasing. CPI can change due to shifts in population or buying habits of consumers. If the economy is up, people will most likely spend more money, and inversely if the economy is down, consumers will spend less. New trends in technology or even fads can also change CPI. If consumers are influenced by media on alternatives to goods and services that buy and use, this too causes changes in CPI. CPI directly impacts the economy because it is used to determine the amount of government assisted people can be given such as Medicaid benefits and Social Security Benefits. The graph below shows the changes over time since January 2000 to January 2014 (Consumer Price Index – Chained Consumer Price Index, 2014).
CPI from January 2000-January 2014
PPI, or Producer Price Index, measures the changed by which producers sell their products (Producer Price Indexes, n.d.). This measures inflation at the beginning stages, ground level, from the manufacturers’ standpoint. Since 2000, PPI like CPI has also increased. Both of these measurements go hand in hand, as the price the manufacturers’/producers charge for their goods and services increases, the amount consumers are paying for these said items also increases. The difference between the two however can include taxes imposed on both producers and/or consumers alike. PPI can be used to determine at what point prices need to escalate. The following graph shows changes in PPI since 2000 (Producer Price Index-Commodities, 2014).
PPI from the Year 2000 to the Year 2014
Consumer Expenditure Survey, CE, is defined by BLS.gov as the “program consists of two surveys, the Quarterly Interview Survey and the Diary Survey, that provide information on the buying habits of American consumers, including data on their expenditures, income, and consumer unit (families and single consumers) characteristics. The survey data are collected for the Bureau of Labor Statistics by the U.S. Census Bureau”. CE has also been increasing since 2000 to present day. CE is pivotal to government fiscal policies because it is the only measurements that shows us not only the amount of money consumers earn and spend, but also consumers spending habits and trends that we observe.
CE is used by policymakers to study the effects of their policies on economic groups and by the Census Bureau to determine Supplemental Poverty Measurements, Like CPI, new technology greatly impacts CE. In the 1980’s, spending on computers and hardware were not as prominent as they are now. According to BLS.gov, changes in internet services and cellphones were also not as prominent in the 1980’s (The Consumer Expenditure Survey—30 Years as a Continuous Survey, 2010). Increases in income and the amount of money consumers spend change CE. The graph below shows these changes (Consumer Expenditure Survey, 2014). Consumer Expenditure Survey 2000-2012
Throughout the last fourteen years, the different units of measurement use to determine inflation have all increased. As the standard and cost of living increases, and as minimum wage continues to increase, all of these units will also increase. This has helped to prevent inflation and hyperinflation. If the prices of goods increase while the income people are bringing in stays the same, this would lead to inflation. As income decreased in 2008-2009, the CPI, PPI, and CE also decreased. The more money we are circulating, the more producers’ will be able to increase the price of goods and services, and the more consumers are going to pay for them. This cycle will continue to grow exponentially. As I stated earlier, there are different methods and fiscal policies governments can implement to avoid inflation. Like Keynesian economics, some of which are based around limiting and controlling government spending.
Consumer Expenditure Survey. Retrieved August 20, 2014 from http://www.bls.gov/cex/ Consumer Expenditure Survey. Retrieved August 20, 2014 from http://data.bls.gov/pdq/SurveyOutputServlet
The Consumer Expenditure Survey—30 Years as a Continuous Survey. Retrieved August 20, 2014 from http://www.bls.gov/cex/ceturnsthirty.htm
Consumer Price Index – Chained Consumer Price Index. (August 19, 2014). Retrieved August 19, 2014 from http://data.bls.gov/pdq/SurveyOutputServlet Consumer Price Index Frequently Asked Questions. (August 15, 2013). Retrieved August 19, 2014, from http://www.bls.gov/cpi/cpifaq.htm#Question_1
Producer Price Index-Commodities. (August 19, 2014). Retrieved August 19, 2014 from http://data.bls.gov/pdq/SurveyOutputServlet Producer Price Indexes. Retrieved August 19, 2014 from